Chapter 5, Problem 14QAP

a.

Summary Introduction

Adequate information:

Year	Project B	Project D
0	-$850	-$1,700
1	$670	$1,300
2	$510	$750
3	$90	$350

Discount rate = 10%

To determine: The project that should be chosen based on the payback period.

Introduction: The payback period is the minimum period of time in which an initial investment of the project is recovered from the net cash inflows that it generates.

b.

Summary Introduction

Adequate information:

Year	Project B	Project D
0	-$850	-$1,700
1	$670	$1,300
2	$510	$750
3	$90	$350

Discount rate = 10%

To determine: The project that should be chosen based on the NPV.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow.

c.

Summary Introduction

Adequate information:

Year	Project B	Project D
0	-$850	-$1,700
1	$670	$1,300
2	$510	$750
3	$90	$350

Discount rate = 10%

To determine: The project should be chosen based on the IRR.

Introduction: IRR is the rate at which the aggregate present value of net cash inflows is equal to the aggregate present value of net cash outflows of the project.

d.

Summary Introduction

Adequate information:

Year	Project B	Project D
0	-$850	-$1,700
1	$670	$1,300
2	$510	$750
3	$90	$350

Discount rate = 10%

To determine: The project that should be chosen based on the Incremental IRR.

Introduction: Incremental IRR tells how much extra a company earns from a project when it invests in a larger project.