Two projects being considered by Greenwood Resources Company are mutually exclusive and have the following projected cash flows. The firm's cost of capital is 8 percent.
Year Project Big Project Small
0 200,000 35,000
1 85,000 16,000
2 85,000 16,000
3 85,000 16,000
a. Calculate each project's payback. If you apply payback criterion, which investment will you choose? why?
b. calculate each project's NPV using the firm's cost of capital (discount rate) of 8%. If you apply the NPV criterion, which investment will you choose? why?
c. Project Big's IRR is 13.21% and Project Small's IRR is 17.62%. Acording to the IRR decision rule, which Project would be accepted? Why?