Question

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

Answer 1

(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