Question

Consider the following two mutually exclusive projects:

  

Year	Cash Flow (A)	Cash Flow (B)
0	–$258,138	–$15,249
1	26,800	4,065
2	54,000	8,853
3	54,000	13,513
4	426,000	9,112

  

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

a. What is the payback period for Project A?

Multiple Choice

3.29 years 3.39 years 3.13 years 3.19 years 3.29 years

   

b. What is the payback period for Project B?

Multiple Choice

2.28 years 2.24 years 2.06 years 2.11 years 2.17 years

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

Multiple Choice

3.58 years 3.52 years 3.24 years 3.31 years 3.41 years

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

Multiple Choice

2.43 years 2.38 years 2.20 years 2.24 years 2.31 years

e. What is the NPV for Project A?

Multiple Choice

$197,976.17 $207,874.98 $203,915.45 $188,077.36 $192,036.88

f. What is the NPV for Project B ?

Multiple Choice

$15,028.38 $15,779.80 $15,479.23 $14,276.96 $14,577.53

  

g. What is the IRR for Project A?

Multiple Choice

26.25% 25.75% 23.75% 24.25% 25.00%

h. What is the IRR for Project B?

Multiple Choice

39.90% 39.14% 36.10% 36.86% 38.00%

i. What is the profitability index for Project A?

Multiple Choice

1.855 1.820 1.679 1.714 1.767

j. What is the profitability index for Project B?

Multiple Choice

2.085 2.045 1.886 1.926 1.986

Answer 1

Answer a
Calculation of Payback period
Year	Project A		Project B
	Cash flow	Cumulative Cash flows	Cash flow	Cumulative Cash flows
0	-$258,138.00	-$258,138.00	-$15,249.00	-$15,249.00
1	$26,800.00	-$231,338.00	$4,065.00	-$11,184.00
2	$54,000.00	-$177,338.00	$8,853.00	-$2,331.00
3	$54,000.00	-$123,338.00	$13,513.00	$11,182.00
4	$426,000.00	$302,662.00	$9,112.00	$20,294.00
Payback period of Project A = 3 Years + [$123338 / $426000] = 3.29 years
Answer b
Payback period of Project B = 2 Years + [$2331/$13513] = 2.17 years
Answer c
Calculation of discounted payback period
Year		Project A			Project B
	Discount Factor @ 6%	Cash flow	Present Value	Cumulative Cash flows	Cash flow	Present Value	Cumulative Cash flows
0	1.00000	-$258,138.00	-$258,138.00	-$258,138.00	-$15,249.00	-$15,249.00	-$15,249.00
1	0.94340	$26,800.00	$25,283.02	-$232,854.98	$4,065.00	$3,834.91	-$11,414.09
2	0.89000	$54,000.00	$48,059.81	-$184,795.17	$8,853.00	$7,879.14	-$3,534.96
3	0.83962	$54,000.00	$45,339.44	-$139,455.73	$13,513.00	$11,345.78	$7,810.82
4	0.79209	$426,000.00	$337,431.90	$197,976.17	$9,112.00	$7,217.56	$15,028.38
Discounted Payback period of Project A = 3 Years + [$139455.73 / $337431.90] = 3.41 years
Answer d
Discounted Payback period of Project B = 2 Years + [$3534.96/$11345.78] = 2.31 years
Answer e
Calculation of NPV of project
		Project A
Year	Discount Factor @ 6%	Cash flow	Present Value
0	1.00000	-$258,138.00	-$258,138.00
1	0.94340	$26,800.00	$25,283.02
2	0.89000	$54,000.00	$48,059.81
3	0.83962	$54,000.00	$45,339.44
4	0.79209	$426,000.00	$337,431.90
NPV of Project A			$197,976.17
Answer f
		Project B
Year	Discount Factor @ 6%	Cash flow	Present Value
0	1.00000	-$15,249.00	-$15,249.00
1	0.94340	$4,065.00	$3,834.91
2	0.89000	$8,853.00	$7,879.14
3	0.83962	$13,513.00	$11,345.78
4	0.79209	$9,112.00	$7,217.56
NPV of Project B			$15,028.38
Answer g				Answer h
Calculation of IRR of project				Calculation of IRR of project
Year	Project A Cash flows			Year	Project B Cash flows
0	-$258,138.00			0	-$15,249.00
1	$26,800.00			1	$4,065.00
2	$54,000.00			2	$8,853.00
3	$54,000.00			3	$13,513.00
4	$426,000.00			4	$9,112.00
IRR of Project A =		25.00%		IRR of Project A =		38.00%
Answer I
Profitability index for Project A = Present Value of future cash inflows / Initial Investment = $456,114.17 / $258,138 = 1.767
Answer J
Profitability index for Project B = Present Value of future cash inflows / Initial Investment = $30,277.38 / $15,249 = 1.986