Question

Consider the following two mutually exclusive projects:

  

Year	Cash Flow (A)				Cash Flow (B)
0	–$	342,000			–$	50,500
1		53,000				24,800
2		73,000				22,800
3		73,000				20,300
4		448,000				15,400

  

Whichever project you choose, if any, you require a 14 percent return on your investment.

  

a-1	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.)

  

	Payback period
Project A	years
Project B	years

  

a-2	If you apply the payback criterion, which investment will you choose?
	Project A Project B

  

b-1	What is the discounted payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

	Discounted payback period
Project A	years
Project B	years

  

b-2	If you apply the discounted payback criterion, which investment will you choose?
	Project A Project B

  

c-1	What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

	NPV
Project A	$
Project B	$

  

c-2	If you apply the NPV criterion, which investment will you choose?
	Project A Project B

  

d-1	What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

  

	IRR
Project A	%
Project B	%

  

d-2	If you apply the IRR criterion, which investment will you choose?
	Project A Project B

  

e-1	What is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.)

  

	Profitability index
Project A
Project B

  

e-2	If you apply the profitability index criterion, which investment will you choose?
	Project A Project B

f.	Based on your answers in (a) through (e), which project will you finally choose?
	(Click to select)Project BProject A

Answer 1

Year	Cash flow A	Cash flow B	Cumulative Cash flow A	Cumulative Cash flow B
0	342000	50500
1	53000	24800	53000	24800
2	73000	22800	126000	47600
3	73000	20300	199000	67900
4	448000	15400	647000	83300

Payback of Project =Year Before the Discounted Payback Period occurs+ cumulative cash flow in the                                                      Year before Recovery/Discounted cash flow in the year after recovery

A 1)

Project A

The above calculation shows that in 3 years $.199000 has been recovered .$ 143000, is balance out of cash outflow. In the 4^th year the cash inflow is $ 448000. It means the pay-back period is 3 to 4 years, calculated as follows.

Payback period of Project A= 3 +(143000/448000)

                                         =3+ 0.319

                                              =3.319 Years.

Project B

The above calculation shows that in 2 years $.47600 has been recovered .$ 2900, is balance out of cash outflow. In the 3^rd year the cash inflow is $ 20300. It means the pay-back period is 2 to 3 years, calculated as follows.

Payback period of Project B=2 +(2900/20300)

                                         =2+ 0.143

                                              =2.143 Years.

Payback period of Project A =3.319 Years

Payback period of Project B=2.143 Years

A 2)

Project B has the lowest payback period, I.e. it take less time to return the initial investment than project A.

B 1)

WACC	14%
Year	Cash flow A	Cash flow B	PV Factor @ 14% (1/(1+r)^n)	Discounted cash flow of Project A (CF*PV)	Cumulative Discounted cash flow of project A	Discounted cash flow of Project B (CF*PV)	Cumulative Discounted cash flow of project B
0	-342000	-50500	1	-342000.00	-342000.00	-50500	-50500
1	53000	24800	0.877	46491.23	-295508.77	21754.39	-28745.6
2	73000	22800	0.769	56171.13	-239337.64	17543.86	-11201.8
3	73000	20300	0.675	49272.92	-190064.72	13701.92	2500.167
4	448000	15400	0.592	265251.96	75187.24	9118.036	11618.2

Discounted Payback Period = A+B/C

A=Last year of negative cumulative cash flow

B=Absolute value of last negative cash flow

C=Discounted Cash flow after A

Discounted Payback Period of Project A= 3+(190064.72/265251.96)

                                                                                = 3+0.717

                                                                                =3.717 Year

Discounted Payback Period of Project B=2+(11201.8/13701.92)

                                                                                =2+0.818

                                                                                =2.818 Years

Discounted Payback Period of Project A=3.717 Year

Discounted Payback Period of Project B=2.818 Years

B 2)

As per the Discounted payback period the project B have the lowest payback period, i.e. it takes less time to return the initial investment than Project A

C 1) NPV

WACC	14%
Year	Project A	Project B	PV factor @14% (1/(1+r)^n)	Discounted cash flow of Project A (Project A*PV factor)	Discounted cash flow of Project B (Project B*PV factor)
1	53000	24800	0.877	46491.23	21754.39
2	73000	22800	0.769	56171.13	17543.86
3	73000	20300	0.675	49272.92	13701.92
4	448000	15400	0.592	265251.96	9118.04
Present Value of Cash Inflow	417187.24	62118.20
Present Value of Cash Outflow	342000	50500
Net Present Value	75187.24	11618.20

NPV= PV of cash inflow- PV of cash outflow

NPV of Project A=75187.24

NPV of Project B=11618.20

C 2)

Project A have the highest NPV so Project A give more return

D 1) IRR

IRR of Project A=21.21%

IRR of Project B=25.76%

D2)

Project B have the highest IRR so it is more profitable.

E 1) Profitability Index

PI=PV of cash inflow/Initial investmet

Profitability Index of Project A=417187.24/342000

= 1.2198

Profitability Index of Project B =62118.20/50500

=1.230

E 2)

Project B have the highest PI . i.e. project B have the more profitable.

F)

By considering all the analysis the project B is more profitable. And also it take less initial investment.

so, Project B is more profitable. So we can choose project B.