Question

6 Instructions Your manager wants you to evaluate two mutually exclusive projects. The cash flows of the project is given in the flowing tables. 8 Project 1 $ uomi Cash flow (30,000) 8,000 10,000 11,000 17,000 12,000 + Onm Project 2 Cash flow $ (15,000) 2,000 5,000 7,000 2,000 25,000 20 The required rate of return is 15%. The first step is too evaluate the project using NPV, IRR, payback rule 21 You will do so in each tab named according to the evaluation method. The second step is to fill in the first two columns in the following table to the results you 22 obtained in each tabble. In column three, note which project would you choose according to the evaluation method in each row. Project 1 Project 2 Which project should you choose? NPV 24 IRR 26 Payback 27 Instructions NPV IRR payback

Answer 1

	Present Value(PV) of Cash Flow:
	(Cash Flow)/((1+i)^t)
	i=discount rate =15%=0.15
	t=Year of Cash Flow
	PROJECT 1
		t	CF	PV=CF/(1.15^t)
		Year	Cash Flow	Discounted CF
		0	($30,000)	($30,000)
		1	$8,000	$6,957
		2	$10,000	$7,561
		3	$11,000	$7,233
		4	$17,000	$9,720
		5	$12,000	$5,966
			SUM	$7,437
	Net Present Value (NPV)	$7,437
	PROJECT 2
		t	CF	PV=CF/(1.15^t)
		Year	Cash Flow	Discounted CF
		0	($15,000)	($15,000)
		1	$2,000	$1,739
		2	$5,000	$3,781
		3	$7,000	$4,603
		4	$2,000	$1,144
		5	$25,000	$12,429
			SUM	$8,695
	Net Present Value (NPV)	$8,695
	QUESTION 2 : IRR
	PROJECT 1
		t	CF
		Year	Cash Flow
		0	($30,000)
		1	$8,000
		2	$10,000
		3	$11,000
		4	$17,000
		5	$12,000
	Internal Rate of Return (IRR)	24.01%	(Using IRR function of excel over the cash flows)
	PROJECT 2
		t	CF
		Year	Cash Flow
		0	($15,000)
		1	$2,000
		2	$5,000
		3	$7,000
		4	$2,000
		5	$25,000
	Internal Rate of Return (IRR)	30.29%	(Using IRR function of excel over the cash flows)
	QUESTION 3 : PAYBACK PERIOD
	Payback Period=Period when Cumulative cash flow=NIL
	PROJECT 1
		Year	Cash Flow	Cumulative Cash Flow
		0	($30,000)	($30,000)
		1	$8,000	($22,000)
		2	$10,000	($12,000)
		3	$11,000	($1,000)
		4	$17,000	$16,000
		5	$12,000	$28,000
	Payback Period=(3+(1000/17000))	3.06	YEARS
	PROJECT 2
		Year	Cash Flow	Cumulative Cash Flow
		0	($15,000)	($15,000)
		1	$2,000	($13,000)
		2	$5,000	($8,000)
		3	$7,000	($1,000)
		4	$2,000	$1,000
		5	$25,000	$26,000
	Payback Period=(3+(1000/2000))	3.50	YEARS
							Clipboard Foht Allghment y Number F41 IRR(G35:640) I F G CF Cash Flow 0 ($30,000) 1 $8,000 2 $10,000 3 $11,000 4 $17,000 5 $12,000 24.01%|(Using IRR function of excel over the cash flows) Internal Rate of Return (IRR) Clipboard Foht Allghment IN Number F53 X for FIRR(G47:652) I F G CF Cash Flow 0 ($15,000) 1 $2,000 2 $5,000 $7,000 4 $2,000 5 $25,000 30.29%|(Using IRR function of excel over the cash flows) Internal Rate of Return (IRR)