Topic 2

Chapter 5:

Questions and Problems 14: Comparing investment Criteria

Halo Project, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive DVD, but not both. Consider the following cash flows of the two mutually exclusive projects for Halo Project. Assume the discount rate for Halo Project is 10 percent

a. Based on the payback period rule, which project should be chosen?

b. Based on the NPV, which project should be chosen?

c. Based on the IRR, which project should be chosen?

d. Based on the incremental IRR, which project should be chosen?

Questions and Problems 17: Comparing Investment Criteria

The treasurer of Philippines Canned Fruits, Inc. (PCF) has projected the cash flows of projects A, B, and C as follows:

Suppose the relevant discount rate is 12 percent a year

a. Compute the profitability index for each of the three projects.

b. Compute the NPV for cach of the three projects.

c. Suppose these three projects are independent. Which project(s) should PCF accept based on the profitability Index rule?

d. Suppose these three projects are mutually exclusive. Which project(s) should PCF accept based on the profitability index rule?

e. Suppose PCF's budget for these projects is $450,000. The projects are not divisible. Which project(s) should PCF accept?