1
INVESTMENT DECISIONS EXERCISES
1. Your company is considering the following two investment projects:
Pr
oject
Initial
investment
(thousands €)
Expected net cash flows (thousands
€)
Year 1 Year 2 Year 3
A
350
350
350
350
B 200 100 200 800
a) Using the NPV criterion and a 9-percent discount rate, which project is better?
b) Using the payback criterion, indicate which project would be preferable and
explain why the result differs from part a).
2. You are going to participate in an auction to purchase a painting by a famous artist. If
you buy the painting, your intention is to lend it to several museums. With this, you
expect to earn €15 million per year during the next 3 years. At the end of the third year,
you would sell the painting to a collector at an estimated price of €62 million.
a) Suppose you pay €25 million for the painting and assume that the required rate of
return (discount rate) for investment in art is 15 percent. What would be the NPV
of your project?
b) What is the maximum price you could pay for the painting? Use an NPV criterion
to answer this question.
3. A company has the following investment opportunities:
Pro
ject
Init
ial
investment
Net cash flows
Year 1 Year 2 Year 3 Year 4
A
600,
000
-
100,
000
450,
000
200,
000
X
B
400,
000
300,
000
100,
000
100,
000
50,
000
Using a discount rate of 9 percent, answer the following questions:
a) What is the minimum value that X must take for project A to be preferable to
project B in terms of NPV?
