Question

A company has to make a choice between two projects namely A & B. The initial capital outlay of two projects are $365,000 and $568,000 respectively for A and B. There will be no scrap value at the end of the life of both the projects. The opportunity cost of capital of the company is 16%. The annual income are as under:
Year Project A Project B

1 15000 8500

2 23000    11100

3 27500    15200

4 19600    14700

5 18400 22500

6 23400    28100

7    35200 39200

8 38100    50400

9 39000    82400

10    45150 79200

11 46800    98640

12 48630    110800

13    52180    61400

14    50280 70560

15 61890 52400

There will be additional cash outflow of $23,000 and $31,000 at the end of 8 year for project A and B respectively.
Analyze which project is better for the company using following approaches:
1. Net present value 2. Payback period 3. Discounted payback period 4. Profitability index

Answer 1

1.) Net Present Value Project A: Initial outlay (yearlo = $ 36500 Annual Income: Present Value I year Cash Flow Discount Rate T (16% o $365000)| $ 15000 0.86 I $23000 0.74 $27500 0.64 $ 19600 0.55 $ 18400 0.47 $ 23400 0.41 $ 35200 0.35 $ 38100 $39000 0. 26 $45150 0.23 $ 46800 0.20 12 $ 48630 0.17 $ 52180 0.15 $50280 0.13 15 $61890 | 0.11 11$ 23000) 0.30 0.30 of non wozt 0 CARI I ($365000) $ 12900 $14020 $17600 $ 10780 $8648 $9594 $ 12320 $11430 $10140 $10384.5 $9360 $8267.1 $7827 $6536.4 $6807.9 ($ 6900) 13

Present value of cash inflows = $159684.9 Present value Dgnitial Irvestment = $341900 NPV - $ 159614.9 - $371900 = - $ 2122851 4) Profitability Indere = $159614.9 -0.43 $ 3719001 AS NPV is negative anol PI less than 1, e project should not be selected

Wet Present Value project Bi Initial outlay (year 0 - $ 568000 annual income : year Cash Flow Discount Rate Present value (16%) +4 - O $ 568000 $8500 $ 11100 $ 15200 $ 14700 $22500 $ 28100 $ 39200 $ 50400 $ 82400 $ 79200 Il $ 98640 12 $ 110800 $ 61400 14 $70560 $52400 8 TC $ 31000) 1 - Amanzt so 1 0.86 0.74 0.64 au 0.55 0.47 0.41 0.35 0.30 0.26 0.23 0. 20 0.17 0.15 0:13 Ooll 0.30 ($ 568000) $ 4310 $8214 $ 9728 $8085 $ 10575 $11521 $ 13720 $15120 $21424 $ 18216 $ 19728 $ 18836 $9210 $9172.8 $5764 $ 9300) 0 13 15

Present value of cash inflow - $ 186623.8 Initial Investment = $568000+ $9300 = $ 574300 NPV = $186623.8-$577300 = - $390676 2 4) Profitability Proleso = $ 186623.8 -0.32 O $577300 Oto NPV is negative and P I less than 1, project should not be elected 002s PC 00102