Question

Problem 7-18 Comparing Investment Criteria

Consider the following cash flows of two mutually exclusive projects for A–Z Motorcars. Assume the discount rate for both projects is 11 percent.

Year	AZM Mini-SUV			AZF Full-SUV
0	–$	545,000		–$	895,000
1		339,000			369,000
2		218,000			458,000
3		169,000			309,000

a. What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

	Payback period
AZM Mini-SUV	years
AZF Full-SUV	years

b. What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

	NPV
AZM Mini-SUV	$
AZF Full-SUV	$

c. What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

	IRR
AZM Mini-SUV	%
AZF Full-SUV	%

Answer 1

Answer:

Pay Back Period:

AZM MINI - SUV = 1.06 Years

AZM FULL - SUV = 2.78 Years

According to payback period AZM MINI -SUV Should be accepted . (Lower Pay Back Period)

NPV:

AZM MINI - SUV = $ 60910.44

AZM FULL - SUV = $ 35093.64

According to NPV Method AZM MINI -SUV Should be accepted . (Higher NPV)

IRR :

AZM MINI - SUV = 18.22%

AZM FULL - SUV = 13.30%

According to IRR Method AZM MINI -SUV Should be accepted . (Higher IRR)

Calculations are given below:

(a) Pay Back Period:

Year	AZM MINI - SUV	Cumulative	AZF FULL - SUV	Cumulative
0	-545000		-895000
1	339000	339000	369000	369000
2	218000	557000	458000	827000
3	169000	726000	309000	1136000

Pay Back (AZM) = 1+(557000-545000)/218000 = 1.06

Pay Back (AZF) = 2+(1136000-895000)/309000 = 2.78

(b) NPV :

NPV - AZM MINI - SUV

Year	AZM MINI - SUV	PV Factor	PV
0	-545000	1.00	-545000
1	339000	0.90	305405.4054
2	218000	0.81	176933.6904
3	169000	0.73	123571.3434
		NPV	60910.44

NPV - AZF FULL - SUV

Year	AZM MINI - SUV	PV Factor	PV
0	-895000	1.00	-895000
1	369000	0.90	332432.4324
2	458000	0.81	371723.0744
3	309000	0.73	225938.1368
		NPV	35093.64

(c) IRR:

IRR - AZM MINI - SUV

Year	AZM MINI - SUV	PV Factor @ 18%	PV	PV Factor @ 19%	PV
0	-545000	1.00	-545000	1.00	-545000
1	339000	0.85	287288.1356	0.84	284873.9
2	218000	0.72	156564.2057	0.71	153943.9
3	169000	0.61	102858.6175	0.59	100287.3
		NPV (1)	1710.96	NPV (2)	-5894.85

IRR = LDR + (NPV1)* (HDR-LDR)/(NPV1 - NPV2)

LDR = 18%

HDR = 19%

IRR = 18 + (19-18)* (1710.96)/(1710.96+5894.85) = 18.22%

IRR - AZF FULL - SUV

Year	AZM MINI - SUV	PV Factor @ 13%	PV	PV Factor @ 14%	PV
0	-895000	1.00	-895000	1.00	-895000
1	369000	0.88	326548.6726	0.88	323684.2
2	458000	0.78	358681.181	0.77	352416.1
3	309000	0.69	214152.5001	0.67	208566.2
		NPV (1)	4382.35	NPV (2)	-10333.5

LDR = 13%

HDR = 14%

IRR = 13 + (4382.35)* (14-13)/ (4382.35+10333.5) = 13.30%