Question

Consider the following two mutually exclusive projects:

  

Year	Cash Flow (A)	Cash Flow (B)
0	–$298,120	–$14,710
1	28,600	4,318
2	54,000	8,021
3	55,000	13,322
4	425,000	8,341

  

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

a. What is the payback period for Project A?

   

b. What is the payback period for Project B?

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

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

e. What is the NPV for Project A?

f. What is the NPV for Project B ?

  

g. What is the IRR for Project A?

h. What is the IRR for Project B?

i. What is the profitability index for Project A?

j. What is the profitability index for Project B?

Answer 1

a

Year	Cash flow stream	Cumulative cash flow
0	-298120	-298120
1	28600	-269520
2	54000	-215520
3	55000	-160520
4	425000	264480

Payback period is the time by which undiscounted cashflow cover the intial investment outlay

this is happening between year 3 and 4

therefore by interpolation payback period = 3 + (0-(-160520))/(264480-(-160520))

3.38 Years

b

Project
Year	Cash flow stream	Cumulative cash flow
0	-14710	-14710
1	4318	-10392
2	8021	-2371
3	13322	10951
4	8341	19292

Payback period is the time by which undiscounted cashflow cover the intial investment outlay

this is happening between year 2 and 3

therefore by interpolation payback period = 2 + (0-(-2371))/(10951-(-2371))

2.18 Years

c

Year	Cash flow stream	Cumulative cash flow	Discounting factor	Discounted cash flows project	Cumulative discounted CF
0	-298120	-298120	1	-298120	-298120.00
1	28600	-269520	1.06	26981.13208	-271138.87
2	54000	-215520	1.1236	48059.80776	-223079.06
3	55000	-160520	1.191016	46179.06057	-176900.00
4	425000	264480	1.26247696	336639.8069	159739.81

Discounted payback period is the time by which discounted cashflow cover the intial investment outlay

this is happening between year 3 and 4

therefore by interpolation payback period = 3 + (0-(-176900))/(159739.81-(-176900))

3.53 Years

Where

Discounting factor =(1 + discount rate)^(corresponding year)

Discounted Cashflow=Cash flow stream/discounting factor

d

Year	Cash flow stream	Cumulative cash flow	Discounting factor	Discounted cash flows project	Cumulative discounted CF
0	-14710	-14710	1	-14710	-14710.00
1	4318	-10392	1.06	4073.584906	-10636.42
2	8021	-2371	1.1236	7138.661445	-3497.75
3	13322	10951	1.191016	11185.40809	7687.65
4	8341	19292	1.26247696	6606.853245	14294.51

Discounted payback period is the time by which discounted cashflow cover the intial investment outlay

this is happening between year 2 and 3

therefore by interpolation payback period = 2 + (0-(-3497.75))/(7687.65-(-3497.75))

2.31 Years

Where

Discounting factor =(1 + discount rate)^(corresponding year)

Discounted Cashflow=Cash flow stream/discounting factor

Please ask remaining parts separately