Question

Consider the following two mutually exclusive projects:

Year	Cash Flow (A)	Cash Flow (B)
0	–$330,000	–$53,000
1	44,000	29,000
2	60,000	23,000
3	65,000	19,000
4	410,000	17,000

The required return on these investments is 15 percent.

Required:
(a)	What is the payback period for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

	Payback period
Project A	years
Project B	years

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

	Net present value
Project A	$
Project B	$

(c)	What is the IRR for each project? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

	Internal rate of return
Project A	%
Project B	%

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

	Profitability index
Project A
Project B

(e)	Based on your answers in (a) through (d), which project will you finally choose?

Answer 1

a)

Year	0	1	2	3	4
Cash Flow (A)	-330000	44000	60000	65000	410000
Cumulative cash flows	-330000	-286000	-226000	-161000	249000
Pay back Period =	3.39	Year before positive cumulative cash flows + Cumulative Cash flow of Year3 /Cash flow of 4
Year	0	1	2	3	4
Cash Flow (B)	-53000	29000	23000	19000	17000
Cumulative cash flows	-53000	-24000	-1000	18000	35000
Pay back Period =	2.05	Year before positive cumulative cash flows + Cumulative Cash flow of Year2 /Cash flow of 3

Pay back period of A =  3.39
Pay back period of B= 2.05

		A	B	C	D	E
	Year	0	1	2	3	4
1	Cash Flow (A)	-330000	44000	60000	65000	410000
2	Discount rate	15%
	NPV	30786.88	NPV(A2,B1:E1)+A1
		A	B	C	D	E
	Year	0	1	2	3	4
1	Cash Flow (B)	-53000	29000	23000	19000	17000
2	Discount rate	15%
	NPV	11821.31	NPV(A2,B1:E1)+A1

NPV of A =  30786.88
NPV of B= 11821.31

		A	B	C	D	E
	Year	0	1	2	3	4
1	Cash Flow (A)	-330000	44000	60000	65000	410000
	IRR	18.15%	IRR(A1:E1)
		A	B	C	D	E
	Year	0	1	2	3	4
1	Cash Flow (A)	-53000	29000	23000	19000	17000
	IRR	26.89%

IRR of A = 18.15%
IRR of B = 26.89%

Profitability index of A = NPV/ initial invetment + 1=  1.09
Profitability index of B = NPV/ initial invetment + 1=  1.22

e) Based on Payback period project  B is better
Based On NPV project A is better.
Based on IRR project B is better
Based on PI project B is better

Best of Luck. God Bless