Question

Problem 5-31 (algorithmic) Consider the following two mutually exclusive projects: Net Cash Flow End of year Project A Project B - $1,100 - $1,100 1 $880 $278 2 $660 $556 3 $440 $834 $220 $1,112 Click the icon to view the interest factors for discrete compounding when i=21% per year. (a) At an interest rate of 21%, which project would you recommend choosing? The present worth of Project A is $ 429.02.(Round to the nearest cent.) The present worth of Project B is $ 499.03 . (Round to the nearest cent.) Which project should be selected? Choose the correct answer below. Project B Project A (b) Compute the area of negative project balance, discounted payback period, and area of positive project balance for each project. Fill in the table below. (Round to the nearest dollar.) Project Balances A B 0 $ -1,100 $ - 1,100 $ - 451 $ - 1053 2 $ 114 $ - 718 3 $ 578 $ - 35 4 $ 919 $ 1.070 n 1

Answer 1

A 1 Year 2 0 3 1 4 2 B C D E F G H CFA CFB PVIF @21% PVA PVB Cumulative PVA Cumulative PVB -1100 -1100 1.00001 - 1100.00 -1100.00 -1100.00 -1100.00 880 278 0.8264 727.27 229.75 -372.73 -870.25 660 556 0.6830 450.79 379.76 78.06 -490.49 440 834 0.5645 248.37 470.77 326.43 - 19.72 220 1112 0.4665 102.63 518.76 429.06 499.04 NPV = 429.06 499.04 Payback Period 1.83 3.04 5 3 6 4 7 8

Option B is better.

The excel calculation and formula used are shown below:

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A B с D G Cumulative PVA 1 Year CFB H Cumulative PVB =F2 CFA - 1100 880 20 - 1100 =E2 3 1 278 =E3+G2 =H2+F3 660 556 4 2 5 3 6 4 PVIF @21% =1/1.21^A2 =1/1.21^A3 =1/1.21444 =1/1.21^A5 =1/1.214A6 NPV = E F PVA PVB =B2*D2 =C2D2 =B3*D3 =C3D3 =B4*D4 =C4*D4 =B5*D5 =C5*D5 =B6*D6 =C6*D6 =SUM(E2:E6) =SUM(F2:56) Payback Period =H3+F4 =H4+F5 |440 =E4+G3 =E5+G4 1=E6+G5 834 220 1112 =H5+F6 7 8 =1+(-G3/E4) =3+(-H5/F6)