Question

Consider the following two mutually exclusive projects:

Year Cash Flow (A) Cash Flow (B)

0 –$289,995 –$26,062

1 27,700 10,832

2 58,000 9,008

3 51,000 8,800

4 419,000 8,595

Whichever project you choose, if any, you require a 15 percent return on your investment. Required:

(a) The payback period for Projects A and B is ____ and ____ years, respectively. (Round your answers to 2 decimal places. (e.g., 32.16))

(b) The discounted payback period for Projects A and B is ____ and ____years, respectively. (Round your answers to 2 decimal places. (e.g., 32.16))

(c) The NPV for Projects A and B is____ $ and ____$ , respectively. (Do not include the dollar sign ($). Round your answers to 2 decimal places, (e.g., 32.16))

(d) The IRR for Projects A and B is____ percent and ____percent ,respectively. (Do not include the percent sign (%). Round your answers to 2 decimal places. (e.g., 32.16))

(e) The profitability index for Projects A and B is and ______and_____ , respectively. (Round your answers to 3 decimal places. (e.g., 32.161))

Answer 1

(a) Payback period for Project A is :

= 3 + ($289,995 - $136,700)/$419,000

= 3 + 0.3659

= 3.3659

= 3.37 (rounded off to two decimal places)

Payback period for project B is :

= 2 + $6220/8595

= 2 + 0.7239

= 2.7239

= 2.72 (rounded off to two decimal places)

(b) Discounted payback period:

Year 1 discounted cash flows

1 $24,086.9565

2 $43,856.3327

3 $33,541.3191

4 $23,9574.6023

So, discounted payback period is :

= 3 + ( $289,995 - $101,484.6083)/$23,9574.6023

= 3.7869

= 3.79  (rounded off to two decimal places)

For Project B discounted payback period is :

Year discounted cash flows

1 $9419.1304

2 $6811.3422

3 $5794.1341

4 44924.2116

= 3 + ($26062 - $22024.6067)/ $4924.2116

= 3.8199

= 3.82 (rounded off to two decimal places)

)c) The NPV of project A is :

NPV = 51,046.2270

= 51,046.23

The NPV of project B is :

NPV of Project B is  = 867.8346

= 867.83

IRR for project A is :

IRR = 20.6

IRR for project B is :

= 16.71 (rounded off to two decimal places)

(e) Profitability index for Project A is :

= NPV + INITIAL INVESTMENT/ INITIAL INVESTMENT

= 51,046.23 + 289,995/ 289995

=1.176

= 1.18 (ROUNDED OFF TO TWO DECIMAL PLACES)

Profitability index for Project B is :

= NPV + INITIAL INVESTMENT/ INITIAL INVESTMENT

= 867.8346 + $26,062/ 26062

= 1.03 (ROUNDED OFF TO TWO DECIMAL PLACES)