Consider the four projects with cash flows as shown. Before proceeding to the questions, we will need to obtain FV for each project by using
MARR = 10%, 20%.
| Project | n:0 | 1 | 2 | 3 |
| A | -1,000 | 900 | 500 | 100 |
| B | -1,000 | 600 | 500 | 500 |
| C | -2,000 | 900 | 900 | 800 |
| D | +1,000 | -402 | -402 | -402 |
a) Explain why the FV criterion prefers A over B at 20% when it prefers B over A at 10%. With MARR = 10%, how much money would you have at time 3 if you invested $1,000 of your own money in A? In B?
b) Which of the following situations would you prefer?
MARR = 10%; you invest $1,000 in B.
MARR = 20%; you invest $1,000 in A. Explain your answer.
c) With MARR =10%, how much money would you have at time 3 if you invested $2,000 of your own money in C?
d) Explain why the FV criterion prefers A over C at 10%, even though in situation d the cash at time 3 is greater than that in situation b (for project A).
e) What is the IRR for D? Would you accept D with MARR = 20%? How would you modify the IRR acceptance rule when examining project D?
f) Suppose A and B are mutually exclusive projects. Which project would you select using MARR of 10% and the IRR criterion?
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