Question

Consider the following two mutually exclusive projects:

  

Year	Cash Flow (A)	Cash Flow (B)
0	–$204,104	–$15,696
1	26,900	5,137
2	51,000	8,924
3	56,000	13,855
4	395,000	8,296

   

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)3.27 years3.34 years3.02 years3.08 years3.18 years

    

(b)	What is the payback period for Project B?
	(Click to select)2.05 years2.22 years2.12 years2.01 years2.18 years

  

(c)	What is the discounted payback period for Project A?
	(Click to select)3.18 years3.11 years3.28 years3.37 years3.44 years

  

(d)	What is the discounted payback period for Project B?
	(Click to select)2.32 years2.14 years2.18 years2.25 years2.36 years

  

(e)	What is the NPV for Project A?
	(Click to select)$215,230.91$237,886.8$219,762.09$226,558.85$233,355.62

  

(f)	What is the NPV for Project B ?
	(Click to select)$15,755.59$14,837.79$14,531.85$15,296.69$16,061.52

  

(g)	What is the IRR for Project A?
	(Click to select)32.96%30.4%31.04%32%33.6%

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

  

(i)	What is the profitability index for Project A?
	(Click to select)2.2162.0052.0472.112.173

  

(j)	What is the profitability index for Project B?
	(Click to select)1.9152.0342.0731.8761.975

rev: 09_18_2012

Answer 1

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)]

a) Payback Period =  

= 3 + (70204 / 395000)

= 3.18

Hence the correct answer is 3.18 Years

Year	Investment	Cash Inflow	Net Cash Flow
0	-2,04,104	-	-2,04,104.00	(Investment + Cash Inflow)
1	-	26,900	-1,77,204.00	(Net Cash Flow + Cash Inflow)
2	-	51,000	-1,26,204.00	(Net Cash Flow + Cash Inflow)
3	-	56,000	-70,204.00	(Net Cash Flow + Cash Inflow)
4	-	3,95,000	3,24,796.00	(Net Cash Flow + Cash Inflow)

b) Payback = 2 + (1635 / 13855)

= 2.12 Years

Hence the correct answer is 2.12 Years

Year	Investment	Cash Inflow	Net Cash Flow
0	-15,696	-	-15,696.00	(Investment + Cash Inflow)
1	-	5,137	-10,559.00	(Net Cash Flow + Cash Inflow)
2	-	8,924	-1,635.00	(Net Cash Flow + Cash Inflow)
3	-	13,855	12,220.00	(Net Cash Flow + Cash Inflow)
4	-	8,296	20,516.00	(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)]

= 3 + ( 86,318.14 /312,877)

= 3.28 Years

Hence the correct answer is 3.28 Years

	Cash Flow	Discounting Factor ( 6%)	Present Value (Cash Flow * Discounting Factor)	Cumulative Cash Flow
0	-2,04,104	1	-2,04,104	-2,04,104
1	26,900	0.943396226	25,377	-1,78,726.64
2	51,000	0.88999644	45,390	-1,33,336.82
3	56,000	0.839619283	47,019	-86,318.14
4	3,95,000	0.792093663	3,12,877	2,26,558.85

d) Discounted Payback Period = 2 + (2907.45 / 11,633)

= 2.25 years

Hence the correct answer is 2.25 Years

	Cash Flow	Discounting Factor ( 6%)	Present Value (Cash Flow * Discounting Factor)	Cumulative Cash Flow
0	-15,696	1	-15,696	-15,696
1	5,137	0.943396226	4,846	-10,849.77
2	8,924	0.88999644	7,942	-2,907.45
3	13,855	0.839619283	11,633	8,725.48
4	8,296	0.792093663	6,571	15,296.69