Question 5 (8 MARKS)

a) Your Company is considering an investment in mutually exclusive investment projects. Project A has an outlay of $1,450 with after tax cash flows of $650 per year in years one to three. Project B involves an initial outlay of $6,700 and generates after tax cash flows of $2,800 per year in years one to three. If the company discount rate is 10% and there are no capital investment restrictions, which project should you accept? Would your decision change if the projects were not mutually exclusive?
b) If a project has a positive Net Present Value (NPV) what do we know about the Internal Rate of Return (IRR) compared to the MARR for that project? Is it higher or lower than the MARR? Explain.
c) When might different evaluation methods provide conflicting rankings of investment projects?
d) What is the price you would be willing to pay for a stock that has a constant dividend of $8 if the required return on the stock is 11%?
e) A semi-annual compounding five-year bond (Par Value $100) has a coupon rate of 10% per annum. The required return on this bond is 7% per annum. Without calculations, would the price of this bond be higher or lower than its Par Value? Why?

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