1) A project costs $500 to start and has a 10 percent chance of generating $400 per year forever

and a 90 percent chance of generating $50 per year forever. The discount rate is 25 percent.
What is the NPV of the project?

2) What is the NPV of the project described below (the cash inflows after tax), when investing
200,000 at the beginning of the project? The cost of capital is at 10%.

Year End Project

1 75,000
2 79,000
3 89,000
3) What is the NPVs and IRRs of the following 2 projects (the initial investments for the projects are
17,000 and 3300 respectively for project A and B). Which project should we choose? The cost of
capital is 10%. Which of the projects is better according to each of the two methods? What is
the explanation for the differences in rankings between the net present value and the internal
rate of return?

Year End Project A Project B

1 17,900 4,500
2 6,850 950

4) AUA is in the process of choosing the better of two equal-risk, mutually exclusive capital
expenditure projects, M and N. The relevant cash flows for each project are shown in the
following table. The firm’s cost of capital is 12%.

a. Calculate each project’s payback period.

b. Calculate the net present value (NPV) for each project.
c. Calculate the internal rate of return (IRR) for each project.
d. Summarize the preferences dictated by each measure you calculated, and indicate which
project you would recommend. Explain why.
e. Explain the circumstances under which a conflict in rankings might exist between NPV and
IRR. (hint: you can draw the net present value profiles for these projects on the same set of axes
to visualize)