Question

Consider the following two mutually exclusive projects:

  

Year	Cash Flow (A)	Cash Flow (B)
0	–$199,124	–$15,993
1	25,800	5,691
2	51,000	8,855
3	54,000	13,391
4	416,000	8,695

  

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

a. What is the payback period for Project A?

   

b. What is the payback period for Project B?

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

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

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

1. Project A

year cash flow pvf@6% PV cumulative pv

1 25800 0.943 24330 24330

2    51000 0.890 45390 69720

3 54000 0.840 45360 115080

4 416000 0.792 329472 444552

Total cash flow 546800

   Total Discounted cash flow 444552

initial invest ment= 199124

a.)Pay back period - Project A= initial investment/ total net cash flow= 199124/546800= 0.364 years

b) Pay back period -Project B

Project B

year cash flow pvf@6% PV cumulative pv

1 5691 0.943 5367 5367

2 8855 0.890 7881 13248

3 13391 0.840 11248 24496

4 8695 0.792 6886 31382

Total cash flow 36632

   Total discounted cash flow 31382

initial investment= 15993

pay back period for project B= initial investment/ total net cash flow= 15993/36632= 0.437years

c) discounted pay back period for project A=   199124-115080/329472= 0.26 years

d) discounted pay back period for project B= 15993-13248/11248= 0.24 Years

e) NPV for project A= discounted cash inflows- discounted cash out flow= 444552-199124=245428

f) NPV for project B=  discounted cash inflows- discounted cash out flow= 36632-15993= 20639

g) IRR FOR PROJECT A= LR + NPV AT LR/NPV AT LR-NPV AT HR*HR-LR

h)IRR FOR PROJECT B= LR + NPV AT LR/NPV AT LR-NPV AT HR*HR-LR

i) profitability index for Project A= discounted cash inflows/initial investment=444552/199124= 2.23

j)profitability index for Project B= discounted cash inflows/initial investment= 31382/15993 = 1.96

Since NPV is higher as well as profitability index is higher ,also pay back period is lower than Project B- Project A should be chosen