Question

Consider the following two mutually exclusive projects:

  

Year	Cash Flow (A)	Cash Flow (B)
0	–$230,324	–$16,246
1	27,000	5,466
2	59,000	8,622
3	56,000	13,991
4	426,000	9,861

  

Whichever project you choose, if any, you require a 6 percent return on your investment.

d. What is the discounted payback period for Project B?

e. What is the NPV for Project A?

  

g. What is the IRR for Project A?

h. What is the IRR for Project B?

i. What is the profitability index for Project A?

j. What is the profitability index for Project B?

Answer 1

к LM arc D8 fx =SUM(D3:07) - A 1 Project A 2 year Cash flows pv@6% Present value Cumulative cash flows Cumulative Discounted cash flows 0 $ (2,30,324.00) 1.0000 $ (2,30,324.00) $ (2,30,324.00) $ (2,30,324.00) 1 $ 27,000.00 0.9434 $ 25,471.70 $ (2,03,324.00) $ (2,04,852.30) 2 $ 59,000.00 0.8900 $ 52,509.79$ (1,44,324.00) $ (1,52,342.51) 3 $ 56,000.00 0.8396 $ 47,018.68 $ (88,324.00) $ (1,05,323.83) 4 $ 4,26,000.00 0.7921 $ 3,37,431.90 $ 3,37,676.00 $ 2,32, 108.07 8 IRR 30.00% NPV $ 2,32,108.07 Payback Period 3+88324/426000 Discounted Payback 3+105323.83/337431.9 Profitability Index 3.21 Years 3.31 Years 1+NPV/Initial investment 1+232108.07/230324 2.01 10 11 Project B 12 year Cash flows pv@6% Present value Cumulative cash flows Cumulative Discounted cash flows 0 $ (16,246.00) 1.0000 $ (16,246.00) $ (16,246.00) $ (16,246.00) 1 $ 5,466.00 0.9434 $ 5,156.60 $ (10,780.00) $ (11,089.40) 21 $ 8,622.00 0.8900 $ 7,673.55 $ (2,158.00) $ (3,415.85) 3 $ 13,991.00 0.8396 $ 11,747.11 $ 11,833.00 $ 8,331.27 4 $ 9,861.00 0.7921 $ 7,810.84 $ 21,694.00 $ 16,142.10 18 IRR 39.00% NPV $ 16,142.10 Payback Period 2 +2158/13991 Discounted Payback 2+3415.85/11747.11 Profitability Index 2.15 Years 2.29 Years 1+NPV/Initial investment 1+16142.1/16246 1.99 19 20

f =SUM(D3:07) B C - A 1 Project A 2 year 30 4 1 pv@6% Cash flows -230324 27000 59000 56000 426000 =IRR(B3:B7) DWN =C3/1.06 =C4/1.06 =C5/1.06 =C6/1.06 NPV Present value =B3%C3 =B4*C4 =B5*C5 =B6*C6 =B7*C7 -SUM(D3:07) Cumulative cash flows Cumulative Discounted cash flows =B3 =D3 =E3+B4 =F3+D4 =E4+B5 =F4+D5 =E5+B6 =F5+D6 =E6+B7 =F6+D7 Payback Period 3+88324/426000 Discounted Payback 3+105323.83/337431.9 Profitability Index =3+88324/426000 Years 3+105323.83/337431.9 Years 1+NPV/Initial investment 1+232108.07/230324 =1+232108.07/230324 9 10 11 Project B 12 year 13 0 Cash flows pv@6% Present value -16246 =B13*C13 5466 =C13/1.06 =B14*C14 8622 =C14/1.06 =B15*C15 13991 =C15/1.06 =B16*C16 9861 =C16/1.06 =B17*C17 =IRR(B13:B17) NPV =SUM(D13:017) 14 1 15 2 16 17 4 18 IRR 19 Cumulative cash flows Cumulative Discounted cash flows =B13 =D13 =E13+B14 =F13+D14 =E14+B15 =F14+D15 =E15+B16 F15+D16 =E16+B17 =F16+D17 Payback Period 2+2158/13991 Discounted Payback 2+3415.85/11747.11 Profitability Index Years Years =2+2158/13991 =2+3415.85/11747.11 1+NPV/Initial investment 1+16142.1/16246 =1+16142.1/16246 20