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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