Question

In: Finance

Consider the following two mutually exclusive projects:    Year Cash Flow (A) Cash Flow (B) 0...

Consider the following two mutually exclusive projects:

  

Year Cash Flow (A) Cash Flow (B)
0 –$275,196        –$15,775         
1 26,300        5,356         
2 55,000        8,583         
3 55,000        13,565         
4 380,000        9,066         

  

Whichever project you choose, if any, you require a 6 percent return on your investment.
Required:
(a) What is the payback period for Project A?
(Click to select)  3.47 years  3.2 years  3.26 years  3.37 years  3.53 years

   

(b) What is the payback period for Project B?
(Click to select)  2.07 years  2.14 years  2.2 years  2.03 years  2.24 years


(c) What is the discounted payback period for Project A?
(Click to select)  3.34 years  3.52 years  3.62 years  3.41 years  3.69 years


(d) What is the discounted payback period for Project B?
(Click to select)  2.34 years  2.38 years  2.16 years  2.2 years  2.27 years


(e) What is the NPV for Project A?
(Click to select)  $141,367.58  $138,452.79  $150,111.97  $145,739.78  $153,026.77


(f) What is the NPV for Project B ?
(Click to select)  $14,712.87  $16,261.59  $15,951.84  $15,022.61  $15,487.23

  

(g) What is the IRR for Project A?
(Click to select)  20.6%  20%  19.4%  21%  19%
(h) What is the IRR for Project B?
(Click to select)  40.95%  37.83%  40.17%  39%  37.05%


(i) What is the profitability index for Project A?
(Click to select)  1.575  1.606  1.453  1.53  1.484


(j) What is the profitability index for Project B?
(Click to select)  2.081  1.883  1.982  1.922  2.041

Solutions

Expert Solution

(a)                      3.37 Years
(b)                      2.14 Years
(c)                      3.52 Years
(d)                      2.27 Years
(e) $    1,45,739.78
(f) $       15,487.23
(g) 20%
(h) 39%
(i)                      1.53
(j)                    1.982
Working: Project A Project B
Year Discount factor Cash flow Cumulative Cash flow Present value of cash flow Cumulative Present value of cash flow Cash flow Cumulative Cash flow Present value of cash flow Cumulative Present value of cash flow
a b=1.06^-a c x d=b*c e f y g=b*f h
0      1.0000 $ -2,75,196.00 $   -2,75,196.00 $     -2,75,196.00 $ -2,75,196.00 $ -15,775.00 $        -15,775.00 $ -15,775.00 $ -15,775.00
1      0.9434            26,300.00       -2,48,896.00 $          24,811.32     -2,50,384.68          5,356.00             -10,419.00         5,052.83     -10,722.17
2      0.8900            55,000.00       -1,93,896.00 $          48,949.80     -2,01,434.88          8,583.00               -1,836.00         7,638.84        -3,083.33
3      0.8396            55,000.00       -1,38,896.00 $          46,179.06     -1,55,255.81        13,565.00              11,729.00       11,389.44         8,306.11
4      0.7921        3,80,000.00         2,41,104.00 $       3,00,995.59       1,45,739.78          9,066.00              20,795.00         7,181.12       15,487.23
IRR =irr(C4:C8) =irr(G4:G8)
20.00% 39.00%
Payback of :
Project A = 3+(138896/380000) =                         3.37
Project B = 2+(1836/13565) =                         2.14
Discounted payback of:
Project A = 3+(155255.81/300995.59) =                         3.52
Project B = 2+(3083.33/11389.44) =                         2.27
Profitability index of:
Project A = Present value of cash inflow /Cost of project
= (275196+145739.78)/275196
=                    1.530
Project B = Present value of cash inflow /Cost of project
= (15775+15487.23)/15775
=                    1.982

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