Answer Happy

1. Investment Appraisal Techniques [25 Marks] Here are the expected cash flows of two mutually exclusive projects A and B for Fast Machines, Inc. Year Project A ($) Project B ($) 0 -800,000 -600,000 1 500,000 400,000 2 400,000 500,000 3 800,000 300,000 a) Calculate the payback period in years and months for each project. Based on the payback rule, which project should be taken? Briefly explain your answer. [5 Marks] b) "Payback gives too much weight to cash flows that occur after the cutoff date". True or False? Explain your answer. [4 Marks] c) Compute the IRR for each project using linear interpolation. Can we decide which project should be accepted based on the IRR? Explain your answer. [10 Marks] d) Assuming the appropriate discount rate is 12%, calculate the profitability index for each project. Briefly explain the main application of the profitability index in investment appraisal. [6 Marks]