Question

Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. YEAR AZM MINI-SUV AZF FULL-SUV 0 –$223,851 –$27,664 1 27,800 11,594 2 58,000 12,793 3 56,000 11,279 4 401,000 9,107 Whichever project you choose, if any, you require a 15 percent return on your investment. Required: a. The payback period for Projects A and B is and years, respectively. (Round your answers to 2 decimal places. (e.g., 32.16)) b. The NPV for Projects A and B is $ and $ , respectively. (Do not include the dollar sign ($). Round your answers to 2 decimal places, (e.g., 32.16)) c. The IRR for Projects A and B is percent and percent ,respectively. (Do not include the percent sign (%). Round your answers to 2 decimal places. (e.g., 32.16)) d. Based on your answers in (a) through (e), you will finally choose Project .

Answer 1

Answer a.

AZM MINI-SUV:

Initial investment of $141,800 is recovered during first 3 years and remaining $82,051 in 4th year.

Payback Period = 3 + $82,051 / $401,000
Payback Period = 3.20 years

AZF FULL-SUZ:

Initial investment of $24,387 is recovered during first 2 years and remaining $3,277 in 3rd year.

Payback Period = 2 + $3,277 / $11,279
Payback Period = 2.29 years

Answer b.

AZM MINI-SUV:

NPV = -$223,851 + $27,800/1.15 + $58,000/1.15^2 + $56,000/1.15^3 + $401,000/1.15^4
NPV = $110,273.21

AZF FULL-SUZ:

NPV = -$27,664 + $11,594/1.15 + $12,793/1.15^2 + $11,279/1.15^3 + $9,107/1.15^4
NPV = $4,714.17

Answer c.

AZM MINI-SUV:

Let IRR be i%

NPV = -$223,851 + $27,800/(1+i) + $58,000/(1+i)^2 + $56,000/(1+i)^3 + $401,000/(1+i)^4
0 = -$223,851 + $27,800/(1+i) + $58,000/(1+i)^2 + $56,000/(1+i)^3 + $401,000/(1+i)^4

Using financial calculator, i = 29.60%

IRR = 29.60%

AZF FULL-SUZ:

Let IRR be i%

NPV = -$27,664 + $11,594/(1+i) + $12,793/(1+i)^2 + $11,279/(1+i)^3 + $9,107/(1+i)^4
0 = -$27,664 + $11,594/(1+i) + $12,793/(1+i)^2 + $11,279/(1+i)^3 + $9,107/(1+i)^4

Using financial calculator, i = 23.53%

IRR = 23.53%

Answer d.

NPV of AZM MINI-SUV is higher than the NPV of AZF FULL-SUZ. So, you will finally choose Project AZM MINI-SUV.