Question

Consider the following two mutually exclusive projects:

  

Year	Cash Flow (A)	Cash Flow (B)
0	–$212,983	–$15,384
1	25,500	4,811
2	57,000	8,092
3	52,000	13,854
4	420,000	9,616

  

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

a. What is the payback period for Project A?

   

b. What is the payback period for Project B?

c. What is the discounted payback period for Project A?

d. What is the discounted payback period for Project B?

e. What is the NPV for Project A?

f. What is the NPV for Project B ?

  

g. What is the IRR for Project A?

h. What is the IRR for Project B?

i. What is the profitability index for Project A?

j. What is the profitability index for Project B?

Answer 1

Year Cash flow(A) Cumulative PVof cash PV @ 20% Cumulative PV PV @25%

cash flow flow@6%   @6%

1 25,500 25,500    24,057 21250 24,057 20,400

2 57,000 82,500    50,730 39,583   74,787 36,480

3    52,000 1,34,500   43,660   30,092 118447 26,624

4 4,20,000 5,54,500 3,32,679 2,02,546   451126 1,72,032

293471 255536

Year Cash flow(B) Cumulative cash flow PVof cash flow@6% Cumulative PV

1 4,811 4,811 4,538 4,538

2 8,092 12,903 7,202 11,740

3 13,854 26,757 11,632 23,372

4 9,616   36,373 7,616 30,988

a) Payback period forProject A=3 years+212983-134500/554500-134500=3.186 years

b) Payback period for Project B=2 years+15384-12903/26757-12903=2.179 years

c) Discounted payback period for Project A= 3 years + 212983-118447/332679=3.284 years

d) Discounted payback period for Project B= 2 years+15384-11740/11632=2.313 years

e) NPV forProject A=451126-212983=238143

f) NPV for Project B=30988-15384=15604

g) IRR for Project A=

h) IRR for Project B=

i) Profitability Index for Project A=451126/212983=2.118

j) Profitiablity Index for Project B=30988/15384=2.014

j)