Consider the following cash flows of two mutually exclusive projects for Chinese Daily News.
|
Year
|
New Sunday Early Edition
|
New Saturday Late Edition
|
|
0
|
-$1,200
|
-$2,100
|
|
1
|
600
|
1,000
|
|
2
|
550
|
900
|
|
3
|
450
|
800
|
a. Based on the payback period rule, which project should be chosen?
b. Suppose there is no corporate tax and the cash flows above are income before the depreciation. The firm uses a straight-line depreciation method (i.e., equal amounts of depreciation in each year). What is the average accounting return for each of these two projects?
c. Which project has a greater IRR?
d. Based on the incremental IRR rule, which project should be chosen?