Question

Consider two mutually exclusive investment projects, each with MARR = 8% as shown in figure

A.On the basis of the IRR criterion, which alternative would be selected?

B. Determine the discounted payback period for each project.

Project's Cash Flow
n	A	B
0	-$20,000	-$25,000
1	$6,000	$10,000
2	$2,000	$3,000
3	$11,000	$8,000
4	$4,000	$2,000
5	$5,000
6	$11,000
7	$2,000

Answer 1

The IRR of project B will be negative since the aggregate future cash flow is less than Cash outflow. Refer the attached picture

IRR of A = 21.65%

Select A.

B. Calculation of discounted payback period

DIscounted payback period = 4 + 1057.49/3402.54 = 4.31 yrs

Year 4 cumulative cash flow = - $ 1,057.49. This means that in next year it would be receiving this amount. Therefore we have to determine the time in which the firm can earn 1057.49.

Discounted payback period = 4.31 years.

Now calculating for project B.

In case of project B the form is unable to recover the invested capital therefore we must not invest in project B.

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