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    Required rate of return on these projects

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    11. Caledonia is considering two additional mutually exclusive projects. The cash flows associated with these projects are as follows:

    YEAR PROJECT A PROJECT B
    0 -$100,000 -$100,000
    1 32,000 0
    2 32,000 0
    3 32,000 0
    4 32,000 0
    5 32,000 $200,000

    The required rate of return on these projects is 11 percent.
    1. What is each project's payback period?
    2. What is each project's net present value?
    3. What is each project's internal rate of return?
    4. What has caused the ranking conflict?
    5. Which project should be accepted? Why?

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    Solution Preview

    1. What is each project's payback period?
    Payback is the period in which the initial cashflows are recovered.

    Project A= Initial investments/Annuity
    =100000/32000
    3.125 years

    Project B=
    This is in between year 4 and year5.
    ...

    Solution Summary

    Project provides the steps to calculate the required rate of return on these projects

    $2.19

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