Question

Year	Cash Flow (A)	Cash Flow (B)
0	–$234,478	–$14,554
1	26,800	4,132
2	60,000	8,022
3	53,000	13,389
4	391,000	9,123

  

Whichever project you choose, if any, you require a 6 percent return on your investment.

Required:

(a)	What is the payback period for Project A?
	(Click to select)3.34 years3.14 years3.4 years3.08 years3.24 years

   

(b)	What is the payback period for Project B?
	(Click to select)2.11 years2.18 years2.07 years2.24 years2.29 years

(c)	What is the discounted payback period for Project A?
	(Click to select)3.36 years3.26 years3.19 years3.46 years3.53 years

(d)	What is the discounted payback period for Project B?
	(Click to select)2.43 years2.2 years2.31 years2.38 years2.24 years

(e)	What is the NPV for Project A?
	(Click to select)$198,413.25$208,333.91$188,492.59$204,365.65$192,460.85

(f)	What is the NPV for Project B ?
	(Click to select)$14,204.02$14,503.05$15,699.18$14,951.6$15,400.15

  

(g)	What is the IRR for Project A?
	(Click to select)26.19%28.35%27.81%25.65%27%

(h)	What is the IRR for Project B?
	(Click to select)39%37.05%37.83%40.17%40.95%

(i)	What is the profitability index for Project A?
	(Click to select)1.7541.9391.7911.8461.902

(j)	What is the profitability index for Project B?

Answer 1

a) Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

The payback period for Project A=

= 3 + ( 94,678 / 391,000)

= 3.24 years

Hence, the correct answer is 3.24 years

Year	Investment	Cash Inflow	Net Cash Flow
0	-2,34,478.00	-	-2,34,478.00	(Investment + Cash Inflow)
1	-	26,800	-2,07,678.00	(Net Cash Flow + Cash Inflow)
2	-	60,000	-1,47,678.00	(Net Cash Flow + Cash Inflow)
3	-	53,000	-94,678.00	(Net Cash Flow + Cash Inflow)
4	-	3,91,000	2,96,322.00	(Net Cash Flow + Cash Inflow)

b) The  payback period for Project B=

= 2+ ( 2400 / 13389)

= 2.18 years

Hence the correct answer is 2.18 Years

Note :

Year	Investment	Cash Inflow	Net Cash Flow
0	-14,554.00	-	-14,554.00	(Investment + Cash Inflow)
1	-	4,132	-10,422.00	(Net Cash Flow + Cash Inflow)
2	-	8,022	-2,400.00	(Net Cash Flow + Cash Inflow)
3	-	13,389	10,989.00	(Net Cash Flow + Cash Inflow)
4	-	9,123	20,112.00	(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)]

The discounted payback period for Project A =

= 3 + ( 111,295.37/ 309,709)

= 3.36 years

Hence the correct asnwer is 3.36 years

	Cash Flow	Discounting Factor ( 6%)	Present Value (Cash Flow * Discounting Factor)	Cumulative Cash Flow
0	-2,34,478	1	-2,34,478	-2,34,478
1	26,800	0.943396226	25,283	-2,09,194.98
2	60,000	0.88999644	53,400	-1,55,795.19
3	53,000	0.839619283	44,500	-1,11,295.37
4	3,91,000	0.792093663	3,09,709	1,98,413.25

d) The  discounted payback period for Project B = 2 + (3516.34 / 11242)

= 2.31 Years

Hence the correct answer is 2.31 Years

	Cash Flow	Discounting Factor ( 6%)	Present Value (Cash Flow * Discounting Factor)	Cumulative Cash Flow
0	-14,554	1	-14,554	-14,554
1	4,132	0.943396226	3,898	-10,655.89
2	8,022	0.88999644	7,140	-3,516.34
3	13,389	0.839619283	11,242	7,725.33
4	9,123	0.792093663	7,226	14,951.60