Question

Mr. Sombat is considering investing in a projects as follows: Mutually Exclusive Project interest 124 Project A Project B (15,000) (105,000) 10,000 30,000 20,000 30,000 30,000 30,000 40,000 30,000 There are some information as follows technique Project A Project B NPV I IRR 9 [ 15.877. 2 I 16.03% MIRA 14.787. Based on the information provided, financial managers should decide to invest in any project, specify the reason for the decision by calculating some missing in for motion to support the decision

Answer 1

A). Payback period:

Project A PB = 3.13 years

Formula	Year (n)	0	1	2	3	4
	Cash flow (CF)	-65000	10000	20000	30000	40000
CFn + CCFn-1	Cumulative Cash Flow (CF)	-65000	-55000	-35000	-5000	35000
(-CCF3/CF4) + 3	Payback period (PB) (in years)	3.13

Project B PB = 3.50 years

Formula	Year (n)	0	1	2	3	4
	Cash flow (CF)	-105000	30000	30000	30000	30000
CFn + CCFn-1	Cumulative Cash Flow (CF)	-105000	-75000	-45000	-15000	15000
(-CCF3/CF4) + 3	Payback period (PB) (in years)	3.50

B). Project A NPV = 6,646.58

Project B NPV = -13,879.52

C). Project A IRR = 15.87%

Project B IRR = 5.56%

D). Project A profitability index (PI) = 1.10

Project B PI = 0.87

E). Project A MIRR = 14.76%

Project B MIRR = 8.10%

All calculations in the tables below:

10000 0.893 8928.571 20000 0.797 15943.878 30000 40000 0.712 0.636 21353.4071 25420.723|| Formula Year (n) Cash flow (CF) Project A 1/(1+12%)^n Discount factor @ 12% CF*Discount factor PV of CF Sum of all PVS NPV Using CFs with IRR function Using CFs & 12 % rate with MIRR MIRR (Sum of PV1 to PV4)/-PVO Profitability index (PI) -65000 1.000 -65000 6646.58 15.87% 14.76% 1.10 IRR

0 30000 0.893 26785.71 2 30000 0.797 23915.82 30000 0.712 21353.41 30000 0.636 19065.54 PV of CF Formula Year (n) Cash flow (CF) Project B 1/(1+12%)An Discount factor @ 12% CF*Discount factor Sum of all PVS NPV Using CFs with IRR function IRR Using CFs & 12 % rate with MIRR MIRR (Sum of PV1 to PV4)/-PVO Profitability index (PI) -105000 1.000 -105000 -13879.52 5.56% 8.10% 0.87

F). Project A should be accepted as it has a positive NPV and higher IRR than the hurdle rate of 12%. Project B is a loss-making project so it should be rejected.