About the problem

erick02

MC Petroleum, Inc., is trying to evaluate the following two mutually exclusive projects. Whichever project the firm chooses, it requires a 13% return on its investment.
Year        Cash Flow (A)        Cash Flow (B)
0               - 500,000                -50,000
1                  80,000                    4,000
2                 100,000                  30,000
3                 250,000                   20,000
4                 380,000                   30,000
(a) If you rely on the payback period method, which investment will you choose? Support your
answer with relevant calculations.
(b) If you use the NPV rule, which investment will you choose? Support your answer with
relevant calculations.
(c) Calculate IRRs of Projects A and B. Explain what specific problems the firm would have if
the firm uses the IRR rule to choose between these two mutually exclusive investments.
(d) Over what range of discount rates would Project A have higher NPV than Project B? Explain
your answers.