Question

i Data Table (Click on the icon located on the top-right coner of the data table below in order to copy its contents into a spreadsheet.) Cash inflows (CF) Project A $45,000 Year Project B $75,000 $45,000 $45,000 $45,000 $45,000 $45,000 $60,000 $30,000 $30,000 $30,000 $30,000 2 3 4 6 N L LO

Answer 1

Pay back period is the period in whihc intial investment is recovered.

Project A = Initial Investment / Cash Flow per Anum

= $ 150,000 / $ 45,000

= 3.33

Project B:

Year	Opening Bal	Cash Flow	Closing Bal
1	$ 1,50,000.00	$ 75,000.00	$      75,000.00
2	$    75,000.00	$ 60,000.00	$      15,000.00
3	$    15,000.00	$ 30,000.00	$    -15,000.00
4	$ -15,000.00	$ 30,000.00	$    -45,000.00
5	$ -45,000.00	$ 30,000.00	$    -75,000.00
6	$ -75,000.00	$ 30,000.00	$ -1,05,000.00

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

= 2 + [ 15000 / 30000 ]

= 2 + 0.5

= 2.5 Years

Project B is Rank 1, Project A is rank 2.

Part B:

NPV = PV of Cash Inflows - PV of Cash Outflows

Project A:

Year	Cash Flow	PVF @9%	Disc CF
0	$ -1,50,000.00	1.0000	$ -1,50,000.00
1	$      45,000.00	0.9174	$      41,284.40
2	$      45,000.00	0.8417	$      37,875.60
3	$      45,000.00	0.7722	$      34,748.26
4	$      45,000.00	0.7084	$      31,879.13
5	$      45,000.00	0.6499	$      29,246.91
6	$      45,000.00	0.5963	$      26,832.03
NPV			$      51,866.34

Project B:

Year	Cash Flow	PVF @9%	Disc CF
0	$ -1,50,000.00	1.0000	$ -1,50,000.00
1	$      75,000.00	0.9174	$      68,807.34
2	$      60,000.00	0.8417	$      50,500.80
3	$      30,000.00	0.7722	$      23,165.50
4	$      30,000.00	0.7084	$      21,252.76
5	$      30,000.00	0.6499	$      19,497.94
6	$      30,000.00	0.5963	$      17,888.02
NPV			$      51,112.36

Project A is Rank 1 and Project B is Rank 2

Part C:

IRR is the rate at which PV of Cash Inflows are equal to PV of Cash outflows.

Project A:

Year	Cash Flow	PVF @19%	Disc CF	PVF @20%	Disc CF
0	$ -1,50,000.00	1.0000	$ -1,50,000.00	1.0000	$ -1,50,000.00
1	$      45,000.00	0.8403	$      37,815.13	0.8333	$      37,500.00
2	$      45,000.00	0.7062	$      31,777.42	0.6944	$      31,250.00
3	$      45,000.00	0.5934	$      26,703.71	0.5787	$      26,041.67
4	$      45,000.00	0.4987	$      22,440.09	0.4823	$      21,701.39
5	$      45,000.00	0.4190	$      18,857.22	0.4019	$      18,084.49
6	$      45,000.00	0.3521	$      15,846.40	0.3349	$      15,070.41
NPV			$        3,439.97		$          -352.04

IRR = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in DIsc Rate ] * 1%

= 19% + [ 3439.97 / 3792.02 ] * 1%

= 19% + 0.91%

= 19.91%

Project B:

Year	Cash Flow	PVF @22%	Disc CF	PVF @23%	Disc CF
0	$ -1,50,000.00	1.0000	$ -1,50,000.00	1.0000	$ -1,50,000.00
1	$      75,000.00	0.8197	$      61,475.41	0.8130	$      60,975.61
2	$      60,000.00	0.6719	$      40,311.74	0.6610	$      39,658.93
3	$      30,000.00	0.5507	$      16,521.21	0.5374	$      16,121.52
4	$      30,000.00	0.4514	$      13,541.97	0.4369	$      13,106.92
5	$      30,000.00	0.3700	$      11,099.98	0.3552	$      10,656.04
6	$      30,000.00	0.3033	$        9,098.34	0.2888	$        8,663.44
NPV			$        2,048.65		$          -817.53

IRR = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in DIsc Rate ] * 1%

= 22% + [ 2048.65 / 2866.19] * 1%

= 22% + 0.71%

= 22.71%

Project B is Rank 1 and Project A is Rank 2

Part D:

In case of Mutually exclusive Projects, Select the Project with Higher NPV hence select Project A.