Consider the following two mutually exclusive projects What

Consider the following two mutually exclusive projects:

  

  

   

What is the payback period for each project? (Round the final answers to 2 decimal places.)

  

  

   

What is the discounted payback period for each project? (Do not round intermediate calculations. Round the final answers to 2 decimal places.)

  

  

  

What is the NPV for each project? (Do not round intermediate calculations. Round the final answers to 2 decimal places.)

  

  

What is the IRR for each project? (Round the final answers to 2 decimal places.)

  

  

  

What is the profitability index for each project? (Do not round intermediate calculation. Round the final answers to 3 decimal places.)

  

  

  

Year	Cash Flow (A)		Cash Flow (B)
0	–$	350,000			–$	50,000
1		45,000				24,000
2		65,000				22,000
3		65,000				19,500
4		440,000				14,600

Solution

a1) Year Cash flow Project A Cumulative Project A Cash Flow Project B Cumulative Project B 0 ($350000) ($350000) ($50000) ($50000) 1 $45000 ($305000) $24000 ($26000) 2 $65000 ($240000) $22000 ($4000) 3 $65000 ($175000) $19500 $15500 4 $440000 $265000 $14600 $30100 Pay back period Project A= 3 Years+$175000/$440000 Pay back period Project A= 3+.39= 3.39 Years Pay back period Project B= 2 Years+$4000/$19500 Pay back period Project B= 2+.20= 2.20 Years a2) Project B is better beacuse of lesser payback period and the investment will be recovered in lesser time period b1) Year Cash flow Project A PV Factor15% Cash Flow* PV Factor Cumulative Discounted cash flow Cash Flow Project B Cash Flow* PV Factor Cumulative Discounted cash flow 0 ($350000) 1 ($350000) ($350000) ($50000) ($50000) ($50000) 1 $45000 0.87 39150 ($310850) $24000 $20880 -29120 2 $65000 0.76 $49400 ($261450) $22000 $16720 -12400 3 $65000 0.66 $42900 ($218550) $19500 $12870 $470 4 $440000 0.57 $250800 $32250 $14600 $8322 $8792 Discounted payback period Project A= 3years +218550/250800 Discounted payback period Project A= 3.87 years Discounted payback period Project B= 2years +12400/12870 Discounted payback period Project B= 2.96 years b2) Project B is better beacuse of short pay back period. c1) Year Cash flow Project A PV Factor15% Cash Flow* PV Factor Cash Flow Project B Cash Flow* PV Factor 0 ($350000) 1 ($350000) ($50000) ($50000) 1 $45000 0.87 39150 $24000 $20880 2 $65000 0.76 $49400 $22000 $16720 3 $65000 0.66 $42900 $19500 $12870 4 $440000 0.57 $250800 $14600 $8322 NPV $32250 NPV $8792 c2) Project A should be selected as ir has higher NPV. d1) Year Cash flow Project A PV Factor15% Cash Flow* PV Factor Cash Flow Project B Cash Flow* PV Factor 0 ($350000) 1 ($350000) ($50000) ($50000) 1 $45000 0.87 39150 $24000 $20880 2 $65000 0.76 $49400 $22000 $16720 3 $65000 0.66 $42900 $19500 $12870 4 $440000 0.57 $250800 $14600 $8322 IRR 2.73% IRR 8% d2) Select Project B because of higher returns e1) Profitability index Project A= 1+NPV/Initial Investment Profitability index Project A= 1+$32550/$350000= 1.093 Profitability index Project B= 1+NPV/Initial Investment Profitability index Project B= 1+$8792/$50000= 1.176 e2) Choose project B beacuse of higher PI f) Project B should be selected because of less payback period, higher IRR and PI