Question

Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$270,425 –$15,509 1 26,300 4,661 2 53,000 8,034 3 52,000 13,551 4 409,000 9,997 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?

Answer 1

Project A:

Discount rate	6.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(270,425.00)	0	(270,425.00)	(270,425.00)
26,300.000	1	24,811.32	(245,613.68)
53,000.000	2	47,169.81	(198,443.87)
52,000.000	3	43,660.20	(154,783.67)
409,000.000	4	323,966.31	169,182.64

a. Payback on A = 3.34 years

discounted payback for A = 3.48 years

NPV = 169,182.64

Profitability index = 1.63

IRR = 22.00%

Project B:

Discount rate	6.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(15,509.00)	0	(15,509.00)	(15,509.00)
4,661.000	1	4,397.17	(11,111.83)
8,034.000	2	7,150.23	(3,961.60)
13,551.000	3	11,377.68	7,416.08
9,997.000	4	7,918.56	15,334.64

Payback = 2.21 years

Discounted payback = 2.35 years

NPV = 15,334.64

PI = 1.99

IRR = 38.00%