In: Finance
Consider the following two mutually exclusive projects: |
Year | Cash Flow (A) | Cash Flow (B) |
0 | –$344,278 | –$14,518 |
1 | 28,600 | 4,179 |
2 | 50,000 | 8,052 |
3 | 58,000 | 13,608 |
4 | 408,000 | 8,500 |
Whichever project you choose, if any, you require a 6 percent return on your investment. |
a. What is the payback period for Project A? |
b. What is the payback period for Project B? |
c. What is the discounted payback period for Project A? |
d. What is the discounted payback period for Project B? |
e. What is the NPV for Project A? |
f. What is the NPV for Project B ? |
g. What is the IRR for Project A? |
h. What is the IRR for Project B? |
i. What is the profitability index for Project A? |
j. What is the profitability index for Project B? |
a. Payback Period for Project A= ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]
= 3 + ( 207678 / 408000)
= 3.509014706
= 3.51 Years
Note:
Year | Investment | Cash Inflow | Net Cash Flow | |
0 | -3,44,278 | - | -3,44,278 | (Investment + Cash Inflow) |
1 | - | 28,600 | -3,15,678 | (Net Cash Flow + Cash Inflow) |
2 | - | 50,000 | -2,65,678 | (Net Cash Flow + Cash Inflow) |
3 | - | 58,000 | -2,07,678 | (Net Cash Flow + Cash Inflow) |
4 | - | 4,08,000 | 2,00,322 | (Net Cash Flow + Cash Inflow) |
b. Payback Period for Project B= ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]
= 2 + ( 2287 / 13608)
= 2.17 years
Hence the correct answer is 2.17 years
Note:
Year | Investment | Cash Inflow | Net Cash Flow | |
0 | -14,518 | - | -14,518 | (Investment + Cash Inflow) |
1 | - | 4,179 | -10,339 | (Net Cash Flow + Cash Inflow) |
2 | - | 8,052 | -2,287 | (Net Cash Flow + Cash Inflow) |
3 | - | 13,608 | 11,321 | (Net Cash Flow + Cash Inflow) |
4 | - | 8,500 | 19,821 | (Net Cash Flow + Cash Inflow) |
c.
Discounted Payback Period =
( Last Year with a Negative Cumulative Cash Flow ) + [( Absolute Value of negative Cumulative Cash Flow in that year)/ Total Present Cash Flow in the following year)]
= 3 + ( 224,099.13/323,174.21)
= 3.69 years
Note:
Cash Flow | Discounting Factor ( 6%) | Present Value (Cash Flow * Discounting Factor) | Cumulative Cash Flow (Present Value of Current Year+ Cumulative Cash Flow of Previous Year) | |
0 | -3,44,278 | 1 | -3,44,278.00 | -3,44,278.00 |
1 | 28,600 | 0.9433962264150940 | 26,981.13 | -3,17,296.87 |
2 | 50,000 | 0.8899964400142400 | 44,499.82 | -2,72,797.05 |
3 | 58,000 | 0.8396192830323020 | 48,697.92 | -2,24,099.13 |
4 | 4,08,000 | 0.7920936632380200 | 3,23,174.21 | 99,075.09 |
d.
Discounted Payback Period =
( Last Year with a Negative Cumulative Cash Flow ) + [( Absolute Value of negative Cumulative Cash Flow in that year)/ Total Present Cash Flow in the following year)]
= 2 + ( 3409.30 / 11425.54)
= 2.298392899 years
= 2.30 Years
Note:
Cash Flow | Discounting Factor ( 6%) | Present Value (Cash Flow * Discounting Factor) | Cumulative Cash Flow (Present Value of Current Year+ Cumulative Cash Flow of Previous Year) | |
0 | -14,518 | 1 | -14,518.00 | -14,518.00 |
1 | 4,179 | 0.9433962264150940 | 3,942.45 | -10,575.55 |
2 | 8,052 | 0.8899964400142400 | 7,166.25 | -3,409.30 |
3 | 13,608 | 0.8396192830323020 | 11,425.54 | 8,016.24 |
4 | 8,500 | 0.7920936632380200 | 6,732.80 | 14,749.04 |