Question

All techniques-Decision among mutually exclusive investments Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and after-tax cash inflows associated with these projects are shown in the following table. Cash flows Initial investment (CF) Cash inflows (CF), t= 1 to 5 Project $30,000 $10,000 Project B $60,000 $21,500 Project C $70,000 $22.500 a. Calculate the payback period for each project. b. Calculate the net present value (NPV) of each project, assuming that the firm has a cost of capital equal to 12%. C. Calculate the internal rate of return (IRR) for each project. d. Indicate which project you would recommend.

Answer 1

Solution:

We will be using our BA II plus professional calculator in order to calculate the payback period , IRR as well as the NPV of all the given projects.

We will be using C0 = (-Initial Outflow for each project)

C1 = Inflows from all the three projects and F1 = 5 since the same flows takes place for 5 consecutive years.

On entering the values of C0 and C1 we will press NPV and enter 12 when asked to enter the rate and then down arrow and then CPT .

For Payback period we keep pressing Down arrow to get the desired PB the payback period and then we press CPT again.

For IRR we will only press IRR and then Press CPT.

We will be calculating the NPV first , with the cost of capital of 12%.

Particulars	Project A	Project B	Project C
Initial Outflow C0	30000, C0 = -30000	60000	70000
Inflows (t = 1 to 5 ) C1, F=5	10000 C1 = 10000 , F1 = 5	21500	22500
NPV(at COC of 12%)	6047.76	17502.68	11107.46
IRR	19.85%	23.216%	18.227%
Payback Period	3 years	2.79 years	3.11 years

Since the IRR as well as the NPV (generally not considered) is maximum for project B, as well as it is having the minimum payback period it will be the recommended project.

Answer 2

Calculate payback period