Question

Consider the following two mutually exclusive projects:

  

Year	Cash Flow (A)	Cash Flow (B)
0	–$331,622	–$16,409
1	28,900	5,372
2	52,000	8,645
3	55,000	13,957
4	387,000	9,670

  

Whichever project you choose, if any, you require a 6 percent return on your investment.

Answer 1

		Project A	Project B
Net Present value		$           94,641.27	$           17,531.06
IRR		14.00%	44.89%
Payback period		3.69 Years	2.16 Years
Profitability Index		1.29	2.20
On the basis of net present value, Project A is acceptable. But on other basis, project B is acceptable.The objective of capital investment is to create money.So, Project A is acceptable.
Working:
		Project A			Project B
Year	Discount factor	Cash flow	Present value of cash flow	Cumulative Present value of cash flow	Cash flow	Present value of cash flow	Cumulative Present value of cash flow
a	b=1.06^-a	c	d=b*c		e	f=b*e
0	1.0000	$      -3,31,622.00	$      -3,31,622.00	$      -3,31,622.00	$         -14,609.00	$         -14,609.00	$         -14,609.00
1	0.9434	$           28,900.00	$           27,264.15	$      -3,04,357.85	$             5,372.00	$             5,067.92	$            -9,541.08
2	0.8900	$           52,000.00	$           46,279.81	$      -2,58,078.03	$             8,645.00	$             7,694.02	$            -1,847.06
3	0.8396	$           55,000.00	$           46,179.06	$      -2,11,898.97	$           13,957.00	$           11,718.57	$             9,871.51
4	0.7921	$       3,87,000.00	$       3,06,540.25	$           94,641.27	$             9,670.00	$             7,659.55	$           17,531.06
	Net Present value		$           94,641.27			$           17,531.06
IRR		=irr(C5:C9)			=irr(F5:F9)
		14.00%			44.89%
Payback period		=	3+(211898.97/306540.25)		=	2+(1847.06/11718.57)
		=	3.69		=	2.16
Cumulative resent value of cash inflow			$           94,641.27			$           17,531.06
Initial Investment			$       3,31,622.00			$           14,609.00
Present value of cash inflow			$       4,26,263.27			$           32,140.06
Initial Investment			$       3,31,622.00			$           14,609.00
Profitability index			1.29			2.20