Question: The Atlanta Industrial Company is analyzing the following two mutually exclusive projects, and the required rate of return is 9%
Year BA1 Project SSX2 Project
0 (Initial Outlay) -400,000 -400,000
1 195,000 40,000
2 160,000 120,000
3 110,000 160,000
4 60,000 270,000
1. If the maximum number of years for the payback period decision rule is 3, which of these projects are acceptable and which would be chosen? Calculate the payback period for both and interpolate if necessary. (Note: I did not ask for discounted payback period here).
2. What is the net present value of each project and which should be selected according to this method? Is there a difference from your decision from question 1? Why?
3. What is the IRR of each project? Which should be selected according to the IRR rule? Is there a difference in your decision from question 2 above? Why? Which would you choose now?