Explain why quantitative measures, Macroeconomics

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Suppose a company is considering two investment projects. Both projects require an upfront expenditure of $30 million. The company estimates that the cost of capital is 10% and that the investments will result in the following after-tax cash flows (in millions of dollars). Complete parts (a) through (e) below.

Year

Project A

Project B

1

$28

$10

2

$20

$15

3

$10

$20

4

$5

$25

a)  Find the regular payback period for each project.

b)  Find the discounted payback period for each project.

c)  Assume that the two projects are independent and the cost of capital is 10%. Which project or projects should the company undertake? Base your results on the NPV.

d) Assume that the two projects are mutually exclusive and the cost of capital is 5%. Which project or projects should the company undertake? Base your results on the MIRR.

e) Explain why quantitative measures may not always be the best way to evaluate a project.


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