Question

In: Finance

Suppose r=10% per annum compounded annually. You are given the following projects: Project Cash flows at...

Suppose r=10% per annum compounded annually. You are given the following projects:

Project

Cash flows at end of year 0

Cash flows at end of year 1

Cash flows at end of year 2

A

-10

30

5

B

-5

5

20

C

-5

5

15

D

0

-40

60

Cash flows are at the end of period.

  1. Calculate NPV of each project
  2. Calculate profitability index of each project (i.e. NPV per 1 dollar of investment)
  3. (Which project(s) would you choose, assuming projects are not mutually exclusive? Why?
  4. ) Which project would you choose, assuming projects are mutually exclusive? Why?

Solutions

Expert Solution

If the projects are non mutually exclusive, then all the projects can be selected since their Profitability Index is greater than 1.

If the projects are mutually exclusive, then Project A is required to be selected since it has the highest NPV. NPV method helps in calculating the returns in absolute terms.

jeff jeffy answered 2 years ago
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