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John Andrews, the CFO of Fitch Services is trying to select the best investment from among...

John Andrews, the CFO of Fitch Services is trying to select the best investment from among four proposals submitted by his divisional managers. Each proposal involves an initial outlay of $120,000. Their cash flows follow: Year Emily Frank Gina Henrique 1 $ 24,000 $72,000 $36,000 $ - 2 30,000 42,000 36,000 - 3 30,000 36,000 36,000 54,000 4 54,000 - 36,000 78,000 5 66,000 - 36,000 119,000 Evaluate and rank each alternative based on a) payback period, b) net present value (use a 15% discount rate), and c) internal rate of return. Be sure to show your work in an excel file! Cost $120,000 Discount Rate 15% a) What is the Payback Period for for each alternative? Emily Blank 1 Frank Blank 2 Gina Blank 3 Henrique Blank 4 Which alternative would you choose using the payback period? Blank 5 b) What is the Net Present Value for each project using a 15% discount rate? Emily Blank 6 Frank Blank 7 Gina Blank 8 Henrique Blank 9 Which alternative would you choose using the NPV using a 15% discount rate? Blank 10 c) What is the IRR for each Project? Emily Blank 11 Frank Blank 12 Gina Blank 13 Henrique Blank 14 Which alternative would you choose using the IRR? Blank 15

Solutions

Expert Solution

a.

Payback period for Emily is calculated in excel and screen shot provided below:

Payback period for Emily is 3.67 years.

Payback period for Frank is calculated in excel and screen shot provided below:

Payback period for Frank is 2.17 years.

Payback period for Gina is calculated in excel and screen shot provided below:

Payback period for Gina is 3.33 years.

Payback period for Henrique is calculated in excel and screen shot provided below:

Payback period for henrique is 3.85 years.

Payback period for Project Frank is lowest among all four projects. So, based on payback period, project Frank should be accepted.

b.

NPV of all four projects is calculated in excel and screen shot provided below:

NPV for Emily is $6,970.70, NPV for Frank is -$1,962.69, NPV for Gina is $677.58 and NPV for Henrique is $19,266.66.

NPV of project Henrique is highest among all four project. So, based on NPV, project Henrique should be accepted.

c.

IRR of all four projects is calculated in excel and screen shot provided below:

IRR for Emily is 17.02%, IRR for Frank is 13.87%, IRR for Gina is 15.24% and IRR for Henrique is 19.19%.

IRR of project Henrique is highest among all four project. So, based on IRR, project Henrique should be accepted.

jeff jeffy answered 2 years ago
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