Question

please show full work step by step for full points and not excel workings. thank you!!

10. Consider the following two mutually exclusive projects: Year Cash Flow (A) - $175,000 10,000 25,000 25,000 375,000 Cash Flow (B) - $20,000 10,000 5,000 3,000 1,000 Whichever project you choose, if any, you require a 15 percent return on your investment. a. If you apply the payback criterion, which investment will you choose? b. If you apply the NPV criterion, which investment will you choose? c. If you apply the IRR criterion, which investment will you choose? d. Based on your answers in (a) through (c), which project will you finally choose? Why?

Answer 1

a. Project A

Payback period=full years until recovery + unrecovered cost at the start of the year/cash flow during the year

   = 3 years +($175,000 - $60,000)/ $375,000

   = 3 years + $115,000/ $375,000

= 3 years + 0.3067

= 3.67 years.

Project B

Payback period=full years until recovery + unrecovered cost at the start of the year/cash flow during the year

= The investment is not recovered with 4 years of cash flow.

Therefore, the payback period is 0.

According to the payback method, the firm should choose Project A since it has the shortest payback period.

b. This can be calculated using a financial calculator by inputting the below:

• •   Press the CF button.
• •   CF0= -$175,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
• •   Cash flow for each year should be entered.
• •   Press Enter and down arrow after inputting each cash flow.
• •   After entering the last cash flow cash flow, press the NPV button and enter the required return of 15%.
• •   Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value is $83,444.62.

Project B

This can also be calculated using a financial calculator by inputting the below:

• •   Press the CF button.
• •   CF0= -$20,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
• •   Cash flow for each year should be entered.
• •   Press Enter and down arrow after inputting each cash flow.
• •   After entering the last cash flow cash flow, press the NPV button and enter the cash flow cash flow, press the NPV button and enter the required return of 15%.
• •   Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value is -$4,979.33.

According to the net present value the firm should choose Project A since it has the highest net present value.

c. Project A

This can be calculated using a financial calculator by inputting the below:

• •   Press the CF button.
• •   CF0= -$175,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
• •   Cash flow for each year should be entered.
• •   Press Enter and down arrow after inputting each cash flow.
• •   After entering the last cash flow cash flow, press the IRR button and the IRR of the project.

The IRR is 27.94%.

Project B

This can be calculated using a financial calculator by inputting the below:

• •   Press the CF button.
• •   CF0= -$20,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
• •   Cash flow for each year should be entered.
• •   Press Enter and down arrow after inputting each cash flow.
• •   After entering the last cash flow cash flow, press the IRR button and the IRR of the project.

The IRR is -2.89%.

According to the internal rate of return, the firm should choose Project A since it has the highest internal rate of return.

d. I will finally choose Project A since it has the highest net present value.

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