A company is considering two short-term projects:
Month A B
0 -$1,200 -$1800
1 $0 $ 400
2 $200 $ 400
3 $300 $ 300
4 $400 $ 500
5 $500 $ 200
6 $600 $ 100
a. Based on the undiscounted payback period, which project is preferred?
b. Calculate the benefit-cost ratio for each alternative (use excel)
c. Based on the benefit-cost ratio analysis method, which project is preferred?
(Show and explain your solution)
a.
Month |
A |
Cumulative Cash flow |
B |
Cumulative Cash flow |
0 |
-1200 |
-1200 |
-1800 |
-1800 |
1 |
0 |
-1200 |
400 |
-1400 |
2 |
200 |
-1000 |
400 |
-1000 |
3 |
300 |
-700 |
300 |
-700 |
4 |
400 |
-300 |
500 |
-200 |
5 |
500 |
200 |
200 |
0 |
6 |
600 |
800 |
100 |
100 |
Project A = 4+(300/400)
= 4.75 months
Project B = 5 months
So, as the un-discounted payback period is less for project A, project A is preferred
b.
Month |
A |
B |
0 |
-1200 |
-1800 |
1 |
0 |
400 |
2 |
200 |
400 |
3 |
300 |
300 |
4 |
400 |
500 |
5 |
500 |
200 |
6 |
600 |
100 |
Benefit |
2000 |
1900 |
Cost |
1200 |
1800 |
B:C ratio |
=2000/1200=1.67 |
=1900/1800=1.06 |
c. Based on B:C ratio, project A is preferred as the value is higher when compared to project B
A company is considering two short-term projects: Month A B 0 -$1,200 -$1800 1 $0 $...
A company is considering two short-term projects: Month A B 0 -$1,200 -$1800 1 $0 $ 400 2 $200 $ 400 3 $300 $ 300 4 $400 $ 500 5 $500 $ 200 6 $600 $ 100 a. Based on the undiscounted payback period, which project is preferred? b. Calculate the benefit-cost ratio for each alternative (use excel) c. Based on the benefit-cost ratio analysis method, which project is preferred?
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