Question

Consider the following two mutually exclusive projects:

  

Year	Cash Flow (A)				Cash Flow (B)
0	–$	345,000			–$	48,500
1		50,000				24,500
2		70,000				22,500
3		70,000				20,000
4		445,000				15,100

  

Whichever project you choose, if any, you require a 14 percent return on your investment.

  

a-1	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.)

  

	Payback period
Project A	years
Project B	years

  

a-2	If you apply the payback criterion, which investment will you choose?
	Project A Project B

  

b-1	What is the discounted payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

	Discounted payback period
Project A	years
Project B	years

  

b-2	If you apply the discounted payback criterion, which investment will you choose?
	Project A Project B

  

c-1	What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

	NPV
Project A	$
Project B	$

  

c-2	If you apply the NPV criterion, which investment will you choose?
	Project A Project B

  

d-1	What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

  

	IRR
Project A	%
Project B	%

  

d-2	If you apply the IRR criterion, which investment will you choose?
	Project A Project B

  

e-1	What is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.)

  

	Profitability index
Project A
Project B

  

e-2	If you apply the profitability index criterion, which investment will you choose?
	Project A Project B

f.	Based on your answers in (a) through (e), which project will you finally choose?
	(Click to select)Project AProject B

Answer 1

	Project A					Project B
A-1	Year					Cash Flow
			Cash Flow	cumulative cash flow			Cash Flow	cumulative cash flow
	0	–$	345,000			–$	48,500
	1		50,000	50,000			24,500	24,500
	2		70,000	120,000			22,500	47,000
	3		70,000	190,000			20,000	1,500	amount to be recovered
	4		445,000	155,000	Amount to be recovered		15,100
	Pay back period in years	previous year of final recovery +(amount to be recovered/cash flow of final year of recovery0	3+(155000/445000)	3.348315		Pay back period in years	previous year of final recovery +(amount to be recovered/cash flow of final year of recovery0	2+(1500/20000)	2.075
A-2	On the basis of Pay back period project B would be accepted
B-1
	Year	Cash Flow	present value of cash flow = cash flow/(1+r)^n r= 14%	cumulative present value		Year	cash flow	present value of cash flow = cash flow/(1+r)^n r= 14%	cumulative present value
	0	-345,000	-345,000
	1	50,000	43859.65	43859.65		0	-48,500	-48,500
	2	70,000	53862.73	97722.38		1	24,500	21491.23	21491.23
	3	70,000	47248.01	144970.4		2	22,500	17313.02	38804.25
	4	445,000	263475.7	200029.6	amount to be recovered	3	20,000	13499.43	9695.753
	discounte Pay back period in years	previous year of final recovery +(present value amount to be recovered/present value of cash flow of final year of recovery0	3+(200029.6/263475.7)	3.759196		4	15,100	8940.412
						discounte Pay back period in years	previous year of final recovery +(present value amount to be recovered/present value of cash flow of final year of recovery0	2+(9695.753/13499.43)	2.718234
B-2	On the basis of discounted Pay back period project B would be accepted
C-1	Year	Cash Flow	present value of cash flow = cash flow/(1+r)^n r= 14%		Year	Cash Flow	present value of cash flow = cash flow/(1+r)^n r= 14%
	0	-345,000	-345,000		0	-48,500	-48,500
	1	50,000	43859.65		1	24,500	21491.23
	2	70,000	53862.73		2	22,500	17313.02
	3	70,000	47248.01		3	20,000	13499.43
	4	445,000	263475.7		4	15,100	8940.412
	net present value	sum of present value of cash flow	63,446		net present value	sum of present value of cash flow	12,744
C-2	Project a as its npv is greater than of B
	Project A				Project b
d-1	Year	Cash Flow			Year	Cash Flow
	0	-345,000			0	-48,500
	1	50,000			1	24,500
	2	70,000			2	22,500
	3	70,000			3	20,000
	4	445,000			4	15,100
	Irr= using irr function in ms excel by following the function as =irr(-345000,50000,70000,70000,445000)	20.04%			Irr= using irr function in ms excel by following the function as =irr(-48500,24500,22500,20000,15100)	27.40%
d-2	project B shoud be selected as its irr is greater than IRR of A
e-1	profitability index	sum of present value of cash inflow/cash outflow	1.166989		profitability index	sum of present value of cash inflow/cash outflow	1.262765
	sum of present value of cash inflow for A	408446.1			sum of present value of cash inflow for A	61244.09
	cash outflow For A	350000			cash outflow For A	48500
e-2	project B should be accepted as its PI is greater than PI Of A
f	Techniques	project A	project B	selection of project on the basis of technique
	Payback period in years	3.348315	2.075	B
	Discounted pay back period	3.759196	2.718234	B
	NPV	63,446	12,744	A
	IRR	20.04%	27.40%	B
	PI	1.166989	1.262765	B
	Most of the technique in favor of B so it should be accpeted