Laurel Hardy is considering the following cash flows for two mutually exclusive projects.

Laurel Hardy is considering the following cash flows for two mutually exclusive projects.

    Year       Cash Flows, Investment X ($)    Cash Flows, Investment Y ($)

 0                               -42,000                                       -42,000

        1                                12,000                                         18,000

        2                                18,000                                         18,000

        3                                27,000                                         18,000

You are required to answer the following questions:

i)              If the cash flows after year 0 occur evenly over each year, what is the payback period for each project, and on this basis, which project would you prefer?

IN THE REMAINING PARTS, ASSUME THAT ALL CASH FLOWS OCCUR AT THE END OF EACH YEAR.

ii)             Would the payback periods then be any different to your answer in i)? If so, what would the payback periods be?

QUESTION 3  continued.

iii)            Sketch freehand the net present value (NPV) profiles for each investment on the same graph. Label both axes and the NPV profile for each investment.

iv)           Calculate the internal rate of return (IRR) for each project and indicate them on the graph. [NOTE: It is satisfactory if the approximate IRR is calculated for Investment X by trial and error, and stated as a percentage correct to the nearer whole number. The IRR for Investment Y should be calculated as a percentage exactly, correct to 1 decimal place.]

QUESTION 3  continued.

v)            Calculate the exact crossover point and indicate it on the above graph.

vi)           State which of the investments you would prefer, depending on the required rate of return (i.e., depending on the discount rate).