Question

Question 5
a.   Given the following cash flows, for the two independent projects A and B, calculate
i.   Payback Period   
ii.   Accounting rate of return   
iii.   Net Present Value
iv.   Profitability index
And recommend acceptance or rejection of projects considering individual techniques of capital budgeting. A rate of 10 % has been selected for the NPV analysis.

    Project A   Project B
Initial outlay   $50,000   $100,000
Cash inflows        
Year 1   $10,000   $ 25,000
Year 2   15,000   25,000
Year 3   20,000   25,000
Year 4   25,000   25,000
Year 5   30,000   25,000
  

b.   Explain the distinctive features of capital budgeting decisions.                                  

Answer 1

as per HomeworkLib policy please find below answer of 1st question (which has 4 sub part) for another q raise new request.

				Cumulative cash flow
year	Project A	Project B		Project A	Project B
0	-50000	-100000		-50000	-100000
1	10000	25000		-40000	-75000
2	15000	25000		-25000	-50000
3	20000	25000		-5000	-25000
4	25000	25000		20000	0
5	30000	25000		50000	25000
i.   Payback Period
	Project A =		=2+5000/25000		2.2	year
	Project B =				4	year
ii.   Accounting rate of return
	Project A
	Average profit =		=50000/5		10000
	Average investment = 50000=				50000
	ARR = 10000/25000=				20%
	Project B
	Average profit =		=25000/5		5000
	Average investment = 100000=				100000
	ARR = 5000/50000=				5%
iii.   Net Present Value
						Present value
		i	ii		iii	iv=i*iii	v=ii*iii
	year	Project A	Project B		PVIF @ 10%	Project A	Project B
	0	-50000	-100000		1.0000	(50,000)	(100,000)
	1	10000	25000		0.9091	9,091	22,727
	2	15000	25000		0.8264	12,397	20,661
	3	20000	25000		0.7513	15,026	18,783
	4	25000	25000		0.6830	17,075	17,075
	5	30000	25000		0.6209	18,628	15,523
	Total					22,217	(5,230)
	NPV A	$ 22,216.88
	NPV B	$ (5,230.33)
iv.   Profitability index
	Profitability index = present value of cash flow / Initial investment
	PI of project A =		=(50000+22217)/50000			1.44
	PI of project B =		=(100000-5230)/100000			0.95
Decision criterial =
	Payback
	Project A =		Accepted	It has lower payback period
	Project B =		Rejected	It has higher paybak period
	ARR
	Project A =		Accepted	It has higher ARR
	Project B =		Rejected	It has lower ARR
	NPV
	Project A =		Accepted	Since NPV is positive
	Project B =		Rejected	Since NPv is negative
	PI
	Project A =		Accepted	PI is > 1
	Project B =		Rejected	PI is < 1