Question

The following two projects are mutually exclusion the firm's cost of capital is12%. The cash flow for each projects are given in the following table. initial investment-60000 year CF(A) CF(B) 1 36000 46000 2 31500 30000 3 28500 15000 Based on NPV IRR PI Payback period which project should be accepted?

Answer 1

NPV =PV of Cash flows -Investment
NPV of A =-60000+36000/(1+12%)+31500/(1+12%)^2+28500/(1+12%)^3 =17540.20
NPV of B =-60000+46000/(1+12%)+30000/(1+12%)^2+15000/(1+12%)^3 =15663.95
NPV of A is more hence Project A must be selected

IRR of A can be calculated using Financial Calculator
CF0=-36000; CF1 =36000; CF2=31500;CG3=28500 CPT IRR
IRR =29.14%

CF0=-60000; CF1 =46000; CF2=30000;CG3=15000 CPT IRR
IRR of B=29.95%
Based on IRR project B should be selected

PI index of A=1+NPV/Investment =1+17540.20/60000 =1.29
PI index of B=1+NPV/Investment =1+15663.95/60000 =1.26

Based on PI index project A must be selected.

Using excel to calculate Payback Period

	CF0	CF1	CF2	CF3
Cash flow	-60000	36000	31500	28500
Cumulative Cash flow	-60000	-24000	7500	36000
Pay Back Period	1.76	(1+24000/31500)
	CF0	CF1	CF2	CF3
Cash flow	-60000	46000	30000	15000
Cumulative Cash flow	-60000	-14000	16000	31000
Pay Back Period	1.47	(1+14000/30000)

Based on Payback period project B must be selected.