Question: You are presented with two proposals, A and B, with equal risks that require initial investments of $9,000 and $7,000. Subsequent net cash inflows are given as follows:
(a) Assuming a weighted average cost of capital of 14 percent, rank the two projects in terms of:
(i) Payback period,
(ii) Internal rate of return, and
(iii) Net present value.
(b) How do you account for the differences in ranking? Which project do you prefer? Why? How might capital rationing change your answer?