Question

Please answer E-J

Consider the following two mutually exclusive projects:

  

Year	Cash Flow (A)	Cash Flow (B)
0	–$229,240	–$14,986
1	28,400	4,361
2	52,000	8,788
3	53,000	13,447
4	387,000	8,559

  

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

a. What is the payback period for Project A?

3.25 years

   

b. What is the payback period for Project B?

2.14 years

c. What is the discounted payback period for Project A?

3.36 years

d. What is the discounted payback period for Project B?

2.27 years

e. What is the NPV for Project A?

f. What is the NPV for Project B ?

  

g. What is the IRR for Project A?

h. What is the IRR for Project B?

i. What is the profitability index for Project A?

j. What is the profitability index for Project B?

Answer 1

Present Value = Future value/ ((1+r)^t)
where r is the interest rate that is 6% and t is the time period in years.
Net present value (NPV) = initial investment + sum of present values of future cash flows.
The internal rate of return is the rate of return for which the NPV is zero.
Use the financial formulas function in excel to calculate the IRR.
Profitability index = Sum of present values of future cash flows/initial investment
CASH FLOW A
Year	0	1	2	3	4
cash flow	-229240	28400	52000	53000	387000
present value		26792.45	46279.81	44499.82	306540.2
NPV	194872.3
IRR	27.00%
Profitability index	1.85
CASH FLOW B
Year	0	1	2	3	4
cash flow	-14986	4361	8788	13447	8559
present value		4114.151	7821.289	11290.36	6779.53
NPV	15019.33
IRR	39.00%
Profitability index	2.00
e. The NPV for Project A is $194872.3.
f. The NPV for Project B is $15019.33.
g. The IRR for Project A is 27%.
h. The IRR for Project B is 39%.
i. The profitability index for Project A is 1.85.
j. The profitability index for Project B is 2.