Question

Consider the following cash flows of two mutually exclusive projects for A-Z Motorcars. Assume the discount rate for both projects is 12 percent.

Year	AZM Mini-SUV	AZF Full-SUV
0	−$500,000	−$850,000
1	330,000	360,000
2	200,000	440,000
3	160,000	300,000

a.	What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
b.	What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
c.	What is the IRR for each project? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

a]

Payback period is the time taken for the cumulative cash flows to equal zero

Payback period = last year in which cumulative cash flow is negative + (cash flow required in next year for cumulative cash flows to equal zero / next year cash flow)

b] and c]

NPV and IRR are calculated using NPV and IRR functions in Excel