Question

You are considering two mutually-exclusive projects: Project A and Project B. The initial cash outlay (cost) associated with Project A is $60,000, whereas the initial cash outlay associated with Project B is $80,000. The required rate of return for both projects is 10%. The expected annual free cash flows from each project are as follows:

Year	Project A	Project B
0	- 60,000	-80,000
1	13,000	15,000
2	13,000	15,000
3	13,000	15,000
4	13,000	15,000
5	13,000	15,000
6	13,000	15,000

A.  Calculate the payback period for each project.

B. Calculate the NPV and the IRR for each project. Which project (if any) should be accepted if they are mutually exclusive? Explain your answer.

C. What are the implications for a firm that selects the wrong project?

Answer 1

Solution:-

To Calculate Payback Period of Projects-

Project A-

Payback Period =

Payback Period =

Payback Period = 4.62 years

Project B-

Payback Period =

Payback Period =

Payback Period = 5.33 years

To Calculate NPV of the Project-

To Calculate IRR of the Project-

Net Present Value of the Project is accepted when it is greater than or equal to zero. In the Given Case NPV of Both Project is negative by which we can not accept any project.

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