Question

Consider the following two mutually exclusive projects:

  

Year	Cash Flow (A)	Cash Flow (B)
0	–$285,537	–$14,875
1	28,200	4,193
2	59,000	8,632
3	52,000	13,431
4	396,000	8,922

   

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

Required:

(a)	What is the payback period for Project A?
	(Click to select)3.2 years3.54 years3.27 years3.47 years3.37 years

    

(b)	What is the payback period for Project B?
	(Click to select)2.09 years2.15 years2.05 years2.26 years2.22 years

  

(c)	What is the discounted payback period for Project A?
	(Click to select)3.52 years3.34 years3.69 years3.62 years3.41 years

  

(d)	What is the discounted payback period for Project B?
	(Click to select)2.36 years2.29 years2.17 years2.4 years2.22 years

  

(e)	What is the NPV for Project A?
	(Click to select)$155,433.03$143,360.56$146,378.68$158,451.15$150,905.86

  

(f)	What is the NPV for Project B ?
	(Click to select)$15,862.45$15,560.31$14,351.74$14,653.88$15,107.1

  

(g)	What is the IRR for Project A?
	(Click to select)20%19.4%21%20.6%19%

(h)	What is the IRR for Project B?
	(Click to select)40.17%39%37.05%37.83%40.95%

  

(i)	What is the profitability index for Project A?
	(Click to select)1.5741.5281.4831.6051.452

  

(j)	What is the profitability index for Project B?
	(Click to select)2.1161.9552.0762.0161.915

Answer 1

a.

For Project A,

Payback Period = 1(28200) + 1(59000) + 1(52000) + 0.3695(146337/396000)

Payback Period = 3.37 years

b.

For Project B,

Payback Period = 1(4193) + 1(8632) + 0.1526(2050/13431)

Payback Period = 2.15 years

c.

Discounted Payback Period for Project A,

In Year 1, Discounted Cash Flow = 28200/(1.06) = $26,603.77

In Year 2, Discounted Cash Flow = 59000/(1.06)² = $52,509.80

In Year 3, Discounted Cash Flow = 52000/(1.06)³ = $43,660.20

In Year 4, Discounted Cash Flow = 396000/(1.06)⁴ = 313,669.10

Discounted Payback period = 1(26,603.77) + 1(52,509.80) + 1(43,660.20) + 0.5189(162,763.23/313669.10)

Discounted Payback Period = 3.52 years

d.

Discounted Payback Period for Project A,

In Year 1, Discounted Cash Flow = 4193/(1.06) = $3,955.66

In Year 2, Discounted Cash Flow = 8632/(1.06)² = $7,682.45

In Year 3, Discounted Cash Flow = 13431/(1.06)³ = $11,276.93

Discounted Payback Period = 1(3955.66) + 1(7682.45) + 0.287(3236.89/11276.93)

Discounted Payback Period = 2.29 years