Question

Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$ 422,000 –$ 38,500 1 45,500 20,100 2 60,500 13,600 3 77,500 17,100 4 537,000 13,900 The required return on these investments is 13 percent. 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 Project A Project B 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.) Net present value Project A Project B 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.) Internal rate of return Project A Project B d. What is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.) Profitability index Project A Project B e. Based on your answers in (a) through (d), which project will you finally choose?

Answer 1

Year	Project 1	Cumulative Cash flow	Project 2	Cumulative Cash flow
0	-422000	-422000	-38500	-38500
1	45500	-376500	20100	-18400
2	60500	-316000	13600	-4800
3	77500	-238500	17100	12300
4	537000	298500	13900	26200
Payback		3.44		2.28
NPV	48709.41		10314.69
IRR	16.68%		26.13%
PI	1.12		1.27

Since the NPV of project 1 is higher, that project should be selected.

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