Question

4. You Corp, is analyzing two mutually exclusive projects. The free cash flows associated with these projects are as follows. Year Cash Flows ܘ -50,000 ܝ ܟܬ Cash Flows -50,000 15,625 15,625 15,625 15,625 15,625 ܚ ܠܛ ܗ 100,000 A) What s each project's payback period? B) What is each project's NPV? C) What is each project's IRR? D) Which project should be accepted? Why?
10% DISCOUNT RATE

Answer 1

A.

Calculate the Projects payback period as follows:

2 Year Cash flows Cumulative cash flows 3 0 50.000.00 15,625.00 15,625.00 5 2 15.625.00 31,250.00 6 3 15.625.00 46,875.00 15,625.00 62,500.00 8 51 15,625.00 9 Payback period ( in Years) 3.2 10 Project 2 12 Year Cash flows Cumulative cash flows 13 0 5 0,000.00 14 1 15 2 16 3 17 4 18 5 100,000.00 100,000.00 19 Payback period (in Years)

AB 2 Year) Cash flows Cumulative cash flows 30 50000 4 1 15625 =B4 5 2 15625 =C4+B5 6 3 15625 =C5+B6 7 4 15625 =C6+B7 8 5 15625 9 Payback period ( in Years) =3+((B3-C6)/B7) 10 Project 2 12 Year Cash flows Cumulative cash flows 130 50000 14 1 =B14 15 2 O =C14+B15 16 30 =C15+B16 174 0 =C16+B17 18 5 100000 =C17+B18 19 Payback period (in Years) =5+(50000-50000)/B18) 11

B & C.

Calculate the Net present value and internal rate of return as follows:

Year 0 Project 2 (50,000.00) B Project 1 (50,000.00 15.625.00 15.625.00 15.625.00 15,625.00 15.625.00 9,231.04 16.99% 8 Net present value (NPV) 9 Internal rate of return 100,000.00 12,092.13 14.87%

20 1 Year Project 1 Project 2 -50000 -50000 15625 15625 5 3 15625 64 15625 15625 100000 8 Net present value (NPV) I=NPV(10%,B3:B7)+B2 =NPV(10%,C3:C7)+C2 9 Internal rate of return =IRR(B2:B7) =IRR(C2:07)

D.

According to Payback period, Project 1 should be accepted as it has low payback period.

According to NPV, Project 2 should be accepted as it has higher NPV.

According to IRR, Project 1 should be accepted as it has higher IRR.