Table 1 gives investments, NPVs, IRRs and the first three years’ cash flow for several capital investment projects. The…

Table 1 gives investments, NPVs, IRRs and the first three years’ cash flow for several capital investment projects. The…

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Table 1 gives investments, NPVs, IRRs and the first three years’ cash flow for several capital
investment projects. The cost of capital is 12% for all projects. Project A and B are mutually
exclusive. The projects are discrete – you cannot make partial investments in any project.
(a) Suppose the firm rejects all projects with payback periods greater than 3 years. What is the
NPV from following this policy?
(b) Which project would you choose, A or B? (c) Suppose the firm has only $200 million to invest – a fixed capital constraint. Which projects
would you undertake? Project Invest C₁ C₂ C3 NPV IRR
A
100
20
20 20
57 17.8
B
200
0 20 40
64
14.5
C
50
20 20 20 41
37.8
D
75
-10 10 30
0
12
E
30
-10
5
7
-3
11
F
10
3 4 5 5.5 30.2
Table 1: Cash flows, NPV, IRR (figures in millions) Show your work in terms of lines or formula.

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Calculate the payback period of all projects Project A Initial investment
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