Question

Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for both projects is 10 percent.

  

Year	AZM Mini-SUV			AZF Full-SUV
0	−$	575,000		−$	980,000
1		373,000			395,000
2		219,000			477,000
3		185,000			339,000

a.	What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

   

b.	What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

   

What is the IRR for each project? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

   

Answer 1

Payback Period:

Project AZM Mini-SUV:

Cost = 575000

In first year, project will generate 373000 of cash flow.

Cost to recover = 202000

Time required = 202000/219000 = 0.92

Payback period = 1 + 0.92 = 1.92 years

Project AZF Full-SUV :

Cost = 980000

In first two years, project will generate 872000 of cash flow.

Cost to recover = 108000

Time required = 108000/339000 = 0.32

Payback period = 2 + 0.32 = 2.32 years

NPV:

NPV = Present value of all the future cash flow - initial investment

Project AZM Mini-SUV:

NPV = 373000/(1+0.1)^1 + 219000/(1+0.1)^2 + 185000/(1+0.1)^3 - 575000

NPV = $84075.88 Answer

Project AZF Full-SUV :

NPV = 395000/(1+0.1)^1 + 477000/(1+0.1)^2 + 339000/(1+0.1)^3 - 980000

NPV = $28001.50 Answer

IRR:

IRR is the rate for which NPV of a project equals zero.

Project AZM Mini-SUV:

0 = 373000/(1+IRR)^1 + 219000/(1+IRR)^2 + 185000/(1+IRR)^3 - 575000

We will use heat and trial method to get that value for which above equation satisfy.

IRR = 19.36% Answer

Project AZF Full-SUV :

NPV = 395000/(1+IRR)^1 + 477000/(1+IRR)^2 + 339000/(1+IRR)^3 - 980000

We will use heat and trial method to get that value for which above equation satisfy.

IRR = 11.65% Answer