Question

Consider the following two mutually exclusive projects:

Year	Cash Flow A	Cash Flow B
0	-170000	-18000
1	10000	10000
2	25000	6000
3	25000	10000
4	380000	8000

Whichever project you choose,if any, you require a 15 percent return on your investment?
If you apply the payback criterion, which investment will you choose?
If you apply the NPV criterion, which investment will you choose?
If you apply the IRR criterion, which investment will you choose?
If you apply the profitability index criterion, which investment will you choose?
Please show all steps. Don't round off until you get to the end.

Answer 1

	Year	Cash Flow	Cumulative Cash Flow	PVIF at 15%	PV at 15%	PVIF at 30%	PV at 30%	PVIF at 29%	PV at 29%
	0	$    -1,70,000.00	$    -1,70,000.00	1	$   -1,70,000.00	1	$     -1,70,000.00	1	$    -1,70,000.00
	1	$          10,000.00	$    -1,60,000.00	0.86957	$          8,695.65	0.76923	$           7,692.31	0.77519	$          7,751.94
	2	$          25,000.00	$    -1,35,000.00	0.75614	$        18,903.59	0.59172	$         14,792.90	0.60093	$        15,023.14
	3	$          25,000.00	$    -1,10,000.00	0.65752	$        16,437.91	0.45517	$       11,379.15	0.46583	$      11,645.84
	4	$      3,80,000.00	$      2,70,000.00	0.57175	$    2,17,266.23	0.35013	$     1,33,048.56	0.36111	$   1,37,222.32
	Total	$      2,70,000.00			$        91,303.38		$         -3,087.08		$          1,643.23
	Payback period = 3+110000/380000 =			3.29	Years
	NPV =			$       91,303.38
	PI = 261303.38/170000 =			1.54
	IRR = 29%+1%*1643.23/(1643.23+3087.08) =			29.35%
	Year	Cash Flow B	Cumulative Cash Flow	PVIF at 15%	PV at 15%	PVIF at 32%	PV at 32%	PVIF at 33%	PV at 33%
	0	$        -18,000.00	$        -18,000.00	1	$      -18,000.00	1	$       -18,000.00	1	$      -18,000.00
	1	$          10,000.00	$          -8,000.00	0.86957	$          8,695.65	0.75758	$           7,575.76	0.75188	$          7,518.80
	2	$            6,000.00	$          -2,000.00	0.75614	$          4,536.86	0.57392	$           3,443.53	0.56532	$          3,391.94
	3	$          10,000.00	$            8,000.00	0.65752	$          6,575.16	0.43479	$           4,347.89	0.42505	$          4,250.55
	4	$            8,000.00	$         16,000.00	0.57175	$          4,574.03	0.32939	$           2,635.08	0.31959	$          2,556.72
		$          16,000.00			$          6,381.70		$                   2.25		$            -281.99
	Payback period = 2+2000/10000 =			2.20	Years
	NPV =			$         6,381.70
	PI = 24381.70/18000 =			1.35
	IRR = 32%+1%*2.25/(2.25+281.99) =			32.01%
	ANSWERS:
1]	If you apply the payback criterion, which investment will you choose?
	Project B will be chosen as it has shorter payback.
2]	If you apply the NPV criterion, which investment will you choose?
	Project A will be chosen as it has higher NPV.
3]	If you apply the IRR criterion, which investment will you choose?
	Project B will be chosen as it has higher IRR
4]	If you apply the profitability index criterion, which investment will you choose?
	Project A will be chosen as it has higher PI.