Question

Consider the following cash flows of two mutually exclusive projects for A–Z 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. 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)- Payback period for each project

Payback Period - AZM Mini-SUV

Year	Cash Flows	Cumulative net Cash flow
0	-5,30,000	-5,30,000
1	3,36,000	-1,94,000
2	2,12,000	18,000
3	1,66,000	1,84,000

Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 1 Year + ($194,000 / 212,000)

= 1 Year + 0.92 years

= 1.92 Years

Payback Period - AZF Full-SUV       

Year	Cash Flows	Cumulative net Cash flow
0	-8,80,000	-8,80,000
1	3,66,000	-5,14,000
2	4,52,000	-62,000
3	3,06,000	2,44,000

Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 2 Year + ($62,000 / 306,000)

= 2 Year + 0.20 years

= 2.20 Years

Payback Period - AZM Mini-SUV = 1.92 years

Payback Period - AZF Full-SUV = 2.20 Years

(b)- NPV for each project

NPV - AZM Mini-SUV

Year	Annual Cash Inflow	Present Value factor at 8%	Present Value of Cash Flow
1	3,36,000	0.9259	3,11,111.11
2	2,12,000	0.8573	1,81,755.83
3	1,66,000	0.7938	1,31,776.15
TOTAL			$ 6,24,643.09

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $ 6,24,643.09 – 530,000

= $ 94,643.09

NPV - AZF Full-SUV

Year	Annual Cash Inflow	Present Value factor at 8%	Present Value of Cash Flow
1	3,66,000	0.9259	3,38,888.89
2	4,52,000	0.8573	3,87,517.15
3	3,06,000	0.7938	2,42,912.67
TOTAL			$ 9,69,318.70

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $ 9,69,318.70 – 880,000

= $ 89,318.70

NPV - AZM Mini-SUV = $ 94,643.09

NPV - AZF Full-SUV = $ 89,318.70

(c)- IRR for each project

IRR for AZM Mini-SUV = 19.08%

IRR for AZF Full-SUV = 13.69%