Question

Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for both projects is 8 percent.

  

Year	AZM Mini-SUV			AZF Full-SUV
0	–$	530,000		–$	880,000
1		336,000			366,000
2		212,000			452,000
3		166,000			306,000

  

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.)

  

	Payback period
AZM Mini-SUV	years
AZF Full-SUV	years

   

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.)

  

	NPV
AZM Mini-SUV	$
AZF Full-SUV	$

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.)

  

	IRR
AZM Mini-SUV	%
AZF Full-SUV	%

Answer 1

a)

AZM Mini SUV
Year	Cash flows (A)	Cummulative Cash flows(B)
1	336000	336000
2	212000	548000
3	166000	714000

Payback period = 1 + (530000 - 336000) / 212000

= 1 + 194000/212000 = 1.92 years

Payback period for AZM Mini SUV = 1.92 years

AZF Full SUV
Year	Cash flows (A)	Cummulative Cash flows(B)
1	366000	366000
2	452000	818000
3	306000	1124000

Payback period = 2 + (880000 - 818000)/ 306000

= 2 + 0.20 = 2.2 years

Payback period for AZF Full SUV = 2.20 years

b)

AZM Mini SUV
Year	Cash flows (A)	Cummulative Cash flows(B)	Discounting factor @8% C	Pv of cash flows @8%(A*C)
1	336000	336000	0.925925926	311111.11
2	212000	548000	0.85733882	181755.83
3	166000	714000	0.793832241	131776.15
			Sum of PV of cash inflows	624643.09
			Cash outflow	-530000
			NPV ( 624643.09 - 530000)	94643.09

AZF Full SUV
Year	Cash flows (A)	Cummulative Cash flows(B)	Discounting factor @8% C	Pv of cash flows @8%(A*C)
1	366000	366000	0.92592593	338888.89
2	452000	818000	0.85733882	387517.15
3	306000	1124000	0.79383224	242912.67
			Sum of PV of cash inflows	969318.70
			Cash outflow	-880000
			NPV ( 969318.7 - 880000)	89318.70

c)

AZM Mini SUV
Year	Cash flows (A)	Discounting factor @18% C	Pv of cash flows @18%(A*C)	Discounting factor @19% C	Pv of cash flows @19%(A*C)
1	336000	0.847457627	284745.76	0.712149266	239282.15
2	212000	0.71818443	152255.10	0.598444762	126870.29
3	166000	0.608630873	101032.72	0.502894758	83480.53
		Total	538033.59		449632.97

IRR = 18 + (538033.59 - 530000) /( 538033.59 - 449632.97)

= 18 + 8033.59 / 88400.62

= 18 + 0.91

= 18.91%

IRR for AZM Mini SUV = 18.91%

AZF Full SUV
Year	Cash flows (A)	Discounting factor @13% C	Pv of cash flows @13%(A*C)	Discounting factor @14% C	Pv of cash flows @14%(A*C)
1	366000	0.884955752	323893.81	0.776276976	284117.37
2	452000	0.783146683	353982.30	0.680944715	307787.01
3	306000	0.693050162	212073.35	0.597319926	182779.90
		Total	889949.46		774684.28

IRR = 13 + (889949.46 - 880000) / ( 889949.46 - 774684.28)

= 13 + 9949.46 / 115265.18

= 13 + 0.09

= 13.09

IRR of the AZF Full SUV = 13.09%