Question

Consider the following two mutually exclusive project. Relevant discount rate for both projects are 12 percent.

Year CF Project A (Rp) CF Project B (Rp)

0 (2,000,000) (2,300,000)

1 900,000 550,000

2 800,000 650,000

3 950,000 708,000

4 978,000 1,155,000

5 300,000 2,000,000

a. If you apply the discounted payback criterion, which project will you choose? Why?

b. If you apply the IRR criterion, which project will you choose? Why?

Hint: Range A: 29-31% ; Range B: 24-26%

c. If you apply the NPV criterion, which project will you choose? Why?

d. If you apply the Profitability Index, which project will you choose? Why?

e. Based on your answers in (a) through (d), which project will you finally choose?

Answer 1

Discounted Payback A =2+((-R3-SUM(R4:R5))/R6)

Discounted Payback B=4+((-S3-SUM(S4:S7))/S8)

IRR =IRR(P3:P8)

NPV =NPV($Q$1,P4:P8)+P3

Profitability Index =NPV($Q$1,P4:P8)/(-P3)