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CH 11b Miami Mutually Exclusive Projects and Payback Method Questions

CH 11b Miami Mutually Exclusive Projects and Payback Method Questions

Question Description

Important General Instructions for Reporting Numerical Answers:

– Do not round intermediate calculations.

– Report your answers to the number of decimal places requested.

– Unless otherwise instructed, solve problems in the given units. IE: if given units are in $K, complete your computations in these units and, as applicable, report your answer in these units (without writing “$” or “K”).

– Do not report any numerical answer as a percent. IE: for example, write

0.324 instead of 32.4%.

– Report negative numbers with a leading minus sign, like this (for example):

-23.451

Not like this: (23.451).

– Note that Canvas removes trailing insignificant figures. If you type, for example, 41.350, Canvas will remove the last decimal place and record your answer as 41.35 This is fine because 41.35 = 41.350.

– Assume time is measured in years unless otherwise stated.

Questions on Mutually Exclusive Equal-length (MEEL) Projects.

The following questions relate to these two projects, each with rocc = 10.0%. The table shows cash flows for each project.

Project EOY 0 EOY 1 EOY 2
Proj. A -100.00 20.00 120.00
Proj. B -50.00 10.00 80.00

Q1:

What is the IRR of project A? (Assume its OK to use IRR for this problem). Write your answer to three decimal places and do not represent it as a percent. IE: write 0.158 not 15.8%.

Hint, you can use the quadratic equation to solve this, or use trail-and-error or Excel.

Quadratic formula:

x = {-b +/- sqrt(b2 – 4ac)} / 2a

where ax2 + bx + c = 0

and x = 1+IRR

Q2:

What is the IRR of project B? Hint, you can use the quadratic equation to solve this, or use trail-and-error or Excel. Write your answer to three decimal places and do not represent it as a percent. IE: write 0.158 not 15.8%

Q3:

What is the BCR of project A? Write your answer to two decimal places.

Q4;

What is the NPV of project A? Write your answer to two decimal places.

Q5:

What is the BCR of Project B? Write your answer to two decimal places.

Q6:

What is the NPV of Project B? Write your answer to two decimal places.

Q7:

If you have an unlimited budget, which project should you choose?

A. Not enough information is provided to answer this question.
B. Neither.
C. They are both equally good.
D. Project A)
E. Project B)

Q8:

What is your reasoning behind your answer to the above question?

A. This project has the biggest bang for each dollar of cash invested.
B. When analysis methods conflict, the projects are assumed to be of equal value
C. This project adds the most value (wealth) to my firm.
D. My money will grow at the fastest rate with this project.

Q9:

Why?

A. This combination gives the highest total BCR
B. This combination gives the highest cumulative IRR
C. This set minimizes costs while providing an overall positive NPV,
D. This set gives the highest total NPV.

Q10:

Payback Method Question.

The payback method is best described as:

A) A DCF Method
B) A method that is good for evaluating low-risk, long-duration projects
C) A method that relies on analysis of GAAP financial statements
E) None of the other mentioned answers
D) A and B


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