54.1
1.You are in charge of considering the following
two projects. Your firm can only do one of them and you have to
decide which one to do. The projects have 4-year lives and their
cash flows (in millions) are given in the table.
0 |
1 |
2 |
3 |
4 |
|
Project A |
-5000 |
2500 |
2000 |
500 |
3300 |
Project B |
-4000 |
1000 |
3000 |
2000 |
700 |
The IRR of Project A is 24% and the IRR of Project B is 25%. The NPV of Project A is $1555 million and the NPV of Project B is $1369 million.
a. What are the payback periods of the two projects? [1 pt]
b. Your underling suggests taking project B because it has the higher Internal Rate of Return. What do you think? Explain your reasoning. [2 pts]