Question

In: Finance

Consider the following two mutually exclusive projects:    Year Cash Flow (A) Cash Flow (B) 0...

Consider the following two mutually exclusive projects:

  

Year Cash Flow (A) Cash Flow (B)
0 –$237,041        –$15,140         
1 27,400        4,688         
2 53,000        8,324         
3 52,000        13,986         
4 409,000        8,403         

  

Whichever project you choose, if any, you require a 6 percent return on your investment.
Required:
(a) What is the payback period for Project A?
(Click to select)3.42 years3.09 years3.16 years3.26 years3.35 years

   

(b) What is the payback period for Project B?
(Click to select)2.15 years2.26 years2.09 years2.04 years2.22 years


(c) What is the discounted payback period for Project A?
(Click to select)3.47 years3.2 years3.54 years3.37 years3.27 years


(d) What is the discounted payback period for Project B?
(Click to select)2.21 years2.35 years2.28 years2.17 years2.4 years


(e) What is the NPV for Project A?
(Click to select)$213,784.6$203,604.38$209,712.51$197,496.25$193,424.16


(f) What is the NPV for Project B ?
(Click to select)$14,335.36$14,637.15$15,089.85$15,542.55$15,844.34

  

(g) What is the IRR for Project A?
(Click to select)25.65%27.81%26.19%28.35%27%
(h) What is the IRR for Project B?
(Click to select)40.17%37.83%39%37.05%40.95%


(i) What is the profitability index for Project A?
(Click to select)1.7661.8591.9521.8031.915


(j) What is the profitability index for Project B?

Solutions

Expert Solution

a)

year cash flow Cumulative cash flow
0 -237041 -237041
1 27400 -237041+27400= -209641
2 53000 -209641+53000=- 156641
3 52000 -156641+52000=- 104641
4 409000 -104641+409000= 304359

Payback period for A= period up to which cumulative cash flow is negative +(cumulative cash flow of that period /cash flow of next period)

= 3 +(104641/409000)

= 3 + .26

= 3.26 years

correct option is " D"

b)

year cash flow Cumulative cash flow
0 -15140 -15140
1 4688 -15140+4688=- 10452
2 8324 -10452+8324= -2128
3 13986 -2128+13986= 11858
4 8403 11858+8403= 20261

Payback period for B = 2 + (2128/13986)

             = 2+ .15

             = 2.15 years

correct option is "A"

c)

year cash flow PVF@6% Discounted cash flow =Cash flow *PVF Cumulative discounted cash flow
0 -237041 1 -237041 -237041
1 27400 .94340 25849.16 -237041+25849.16=-211191.84
2 53000 .89000 47170 -211191.84+47170= -164021.84
3 52000 .83962 43660.24 -164021.84+43660.24= -120361.6
4 409000 .79209 323964.81 -120361.6+323964.81= 203603.21

Discounted payback period for A = 3 + (120361.61 /323964.81)

                   = 3 + .37

                = 3.37 years

correct option is " D"

d)

year cash flow PVF@6% Discounted cash flow =Cash flow *PVF Cumulative discounted cash flow
0 -15140 1 -15140 -15140
1 4688 .94340 4422.66 -15140+4422.66= -10717.34
2 8324 .89000 7408.36 -10717.34+7408.36= -3308.98
3 13986 .83962 11742.93 -3308.98+11742.93= 8433.95
4 8403 .79209 6655.93 8433.95+6655.93= 15089.88

Discounted payback period fro B= 2+(3308.98/11742.93)

            = 2+ .28

              =2.28 years

correct option is "C"


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