Question

Each of two mutually exclusive projects involves an investment of $124,000. Net cash flows for the projects are as follows:

Year	Project A	Project B
1	60,000	57,000
2	62,000	64,000
3	40,000	47,000

A.    Calculate each project's payback period. (2 Points)

B.    Compute the Net Present Value (NPV) of each project when the firm's cost of capital is 10 percent. (2 Points)

C.    Internal Rate of Return (IRR) -Your choice; based on your answer to part (B). (2 Points)

D.    Modified Internal Rate of Return (MIRR) Your choice; based on your answer to part (B). (2 Points)

please solve without using excel.

Answer 1

Payback period is the period in which initial investment is recovered.

Project A:

Year	Opening Bal	CF	Clsoing Bal
1	$ 1,24,000.00	$ 60,000.00	$ 64,000.00
2	$    64,000.00	$ 62,000.00	$    2,000.00
3	$      2,000.00	$ 40,000.00	$ -38,000.00

PBP = Year in which least +ve CB + [ CB in that year / CF in next Year ]

= 2 + [ 2000 / 40000 ]

= 2 + 0.05

= 2.05 Years

Project B:

Year	Opening Bal	CF	Clsoing Bal
1	$ 1,24,000.00	$ 57,000.00	$ 67,000.00
2	$    67,000.00	$ 64,000.00	$    3,000.00
3	$      3,000.00	$ 47,000.00	$ -44,000.00

PBP = Year in which least +ve CB + [ CB in that year / CF in next Year ]

= 2 + [ 3000 / 47000 ]

= 2 + 0.06

= 2.06 Years