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1,000

3,500

A. Calculate each project's nominal payback period, net present value (NPV), internal rate of return (IRR), and profitability index (PI).

B. Should both projects be accepted if they are interdependent?

C. Which projects should be accepted if they are mutually exclusive?

D. How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? At what values of k would this conflict exist? (Hint: Plot the NPV profiles for each project to find the crossover discount rate k.)

E. Why does a conflict exist between NPV and IRR rankings? ST15.2 Solution

A. Payback:

To determine the nominal payback period, construct the cumulative cash flows for each project:

Cumulative Cash Flow

Year

Project X

Project Y

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