Question

Nokia has two Projects. Project A and Project B. Which project should be accepted under each measurement.

	Project A	Project B
NPV ($)	2578	3842
IRR ($)	12	14
MIRR (%)	10	11
PI	1.2	1.5
Payback Period (years)	3	3.8
Discounted Payback Pd (Years)	4.2	4.8

Nokia's cost of capital is 8%. Its critical payback period is 2 years and the critical discount payback period is 3 years

NPV - (Project A be accepted, Project B be accepted, or neither)

IRR - (Project A be accepted, Project B be accepted, or neither)

MIRR - (Project A be accepted, Project B be accepted, or neither)

PI - (Project A be accepted, Project B be accepted, or neither)

Payback pd - (Project A be accepted, Project B be accepted, or neither)

Discounted Payback pd - (Project A be accepted, Project B be accepted, or neither)

Answer 1

It has been assumed that both the projects are mutually exclusive and they cannot occur at same time

1. Net Present value-when there are two projects mutually exclusive than the project having higher net present value is accepted. Project B should be accepted according to net present value.

2. Internal rate of return- when the internal rate of return is higher than cost of capital then project should be accepted and the project having higher margin will be selected and in this case project B will be selected because it have higher margin against cost of capital.

3. MIRR - in case of project having higher MIRR over cost of capital should be selected and project B should be selected.

4. Profitability index- project which will have higher profitability index above 1 will be selected. Hence project B should be selected.

5. Payback period-critical payback period is 2 years and neither of the project have a lower payback period of 2 years or lower so NEITHER of them should be accepted.

6. Discounted payback period is given that critical discounted payback period is 3 years so neither of the projects have a lower payback period than three years so NEITHER of them should be selected.