Question

Medical Technology Enterprises is trying to select the best investment from among four alternatives. The company’s cost ofcapital (CCC) is 14%. The initial cost and future cash flows of the alternatives are presented below. You can use Excel to solve this problem. If you do, please submit provide formulas used.

Year	Alternative A ($)	Alternative B (S)	Alternative C ($)	Alternative D ($)
0	-200,000	-200,000	-200,000	-200,000
1	70,000	0	60,000	90,000
2	80,000	0	60,000	100,000
3	70,000	90,000	60,000	100,000
4	40,000	100,000	60,000	0
5	30,000	100,000	60,000	0

A) Calculate the Payback period for each alternative and complete the following table (round to two decimal places):

	Alternative A	Alternative B	Alternative C	Alternative D
Payback period

B) Which of the alternatives would you select under the payback method? Please explain why.

C) Calculate the net present value (NPV) for each alternative and complete the following table (round to whole numbers):

	Alternative A	Alternative B	Alternative C	Alternative D
NPV

D) Which of the alternative would select under the net present value? Please explain why.

E) Calculate the internal rate of return (IRR) for each alternative and complete the following table (round to two decimal places):

	Alternative A	Alternative B	Alternative C	Alternative D
IRR

F) Which of the alternative would you select under the internal rate of return? Please explain why.

G) Calculate the modified internal rate of return (MIRR) for each alternative and complete the following table (round to two decimal places):

	Alternative A	Alternative B	Alternative C	Alternative D
MIRR

H) Which of the alternative would you select under the modified internal rate of return? Please explain why.

Answer 1

Payback period = Years before full recovery + (Unrecovered cost @ start of the year / Cash flow during the year)

A) Payback period (Alt A) = 2 + (50,000/200,000) = 2.25 years

Payback period (Alt B) = 4 + (10,000/200,000) = 4.05 years

Payback period (Alt C) = 3 + (20,000/200,000) = 3.10 years

Payback period (Alt D) = 2 + (10,000/200,000) = 2.05 years

B) I would select alternative D using the payback period because it takes the least number of time to return the initial investment of the project.

NPV = ((Cash Flow1/(1+r)^t) + (Cash flow2/(1+r)^t) + (Cash flowT/(1+r)^t)) - Initial Investment

C) Using the above formula, We calculate NPV of all the projects:

NPV (Alt A) = $    9,473.19

NPV (Alt B) = $ (28,108.67)

NPV (Alt A) = $    5,982.86

NPV (Alt A) = $ 23,388.27

D) I would select alternative D again using the NPV method because I am getting the highest amount of return on my investment. A project should only be chosen if it has a positive NPV and when there are multiple alternatives with positive NPVs then the highest positive NPV should be chosen.