Problem:
The director of capital budgeting for a firm has identified two mutually exclusive projects, A and B, with the following expected net cash flows:
Expected Net Cash Flows
Year Project A Project B
0 ($120) ($120)
1 80 20
2 60 70
3 30 90
Both of the projects have a cost of capital of 14 percent.
(i) What is Project A's and Project B's net present value (NPV)?
(ii) What is the profitability index (PI) for Project B?
(iii) What is the modified internal rate of return for Project A?