Question

Consider the following two mutually exclusive projects:

  

Year	Cash Flow (A)				Cash Flow (B)
0	–$	340,000			–$	51,500
1		55,000				25,000
2		75,000				23,000
3		75,000				20,500
4		450,000				15,600

  

Whichever project you choose, if any, you require a 16 percent return on your investment.

  

a-1	What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

	Payback period
Project A	years
Project B	years

  

a-2	If you apply the payback criterion, which investment will you choose?
	Project A Project B

  

b-1	What is the discounted payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

	Discounted payback period
Project A	years
Project B	years

  

b-2	If you apply the discounted payback criterion, which investment will you choose?
	Project A Project B

  

c-1	What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

	NPV
Project A	$
Project B	$

  

c-2	If you apply the NPV criterion, which investment will you choose?
	Project A Project B

  

d-1	What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

  

	IRR
Project A	%
Project B	%

  

d-2	If you apply the IRR criterion, which investment will you choose?
	Project A Project B

  

e-1	What is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.)

  

	Profitability index
Project A
Project B

  

e-2	If you apply the profitability index criterion, which investment will you choose?
	Project B Project A A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows:    Year Cash Flow 0 –$ 27,300 1 11,300 2 14,300 3 10,300    What is the NPV for the project if the required return is 10 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)      NPV $       At a required return of 10 percent, should the firm accept this project? Yes No    What is the NPV for the project if the required return is 26 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)      NPV $       At a required return of 26 percent, should the firm accept this project? Yes No

Answer 1

			Project A		Project B
	Year	PV Factor@16%	Cash Flows	PV of Cash Flows	Cash Flows	PV of Cash Flows
	Year 0	1.000	(340,000)	(340,000)	(51,500)	(51,500)
	Year 1	0.862	55,000	47,414	25,000	21,552
	Year 2	0.743	75,000	55,737	23,000	17,093
	Year 3	0.641	75,000	48,049	20,500	13,133
	Year 4	0.552	450,000	248,531	15,600	8,616
			NPV	$   59,731.33		$    8,893.69
	PV of Cash inflows			399,731		60,394
a1		Project A	Project B
	Payback Periods in years	3.30	2.17
a2	On Payback Criterion Project B will be selected.
		Project A	Project B
b1	Discounted Payback Periods in years	3.76	2.98
b2	On discounted Payback Criterion Project B will be selected.
c1		Project A	Project B
	NPV	$     59,731.33	$   8,893.69
c2	On NPV Criterion Project A. will be selected.
d1			Project A
	Year	PV [email protected]%	Cash Flows	PV of Cash Flows
	Year 0	1.000	(340,000)	(340,000)
	Year 1	0.820	55,000	45,086
	Year 2	0.672	75,000	50,398
	Year 3	0.551	75,000	41,313
	Year 4	0.452	450,000	203,196
			NPV	$           (7.02)		$                 -
	So IRR is close to 21.99%
					Project B
	Year	PV [email protected]%			Cash Flows	PV of Cash Flows
	Year 0	1.000			(51,500)	(51,500)
	Year 1	0.799			25,000	19,981
	Year 2	0.639			23,000	14,692
	Year 3	0.511			20,500	10,466
	Year 4	0.408			15,600	6,365
						$            3.71
	So IRR is close to 25.12%
		Project A	Project B
	NPV	21.99%	25.12%
d2	On IRR Criterion Project B will be selected.
e1	PI = PV of Cash Inflows/Imvestment
		Project A	Project B
	PI	1.176	1.173
	On PI   Criterion Project A will be selected.
2	Details	Year 0	Year 1	Year 2	Year 3
	Cash Flows	(27,300)	11,300	14,300	10,300
	PV factor @10%	1.000	0.909	0.826	0.751
	PV of Cash Flows	(27,300)	10,273	11,818	7,739
	NPV =	$       2,529.45
	PV factor @26%	1.000	0.794	0.630	0.500
	PV of Cash Flows	(27,300)	8,968	9,007	5,149
	NPV =	(4,175)
		@10%	@26%
	NPV	$       2,529.45	$ (4,175.41)
	Decision	Acceptable	Rejected

Answer 2

Consider the following two mutually exclusive projects:

  

Year	Cash Flow (A)				Cash Flow (B)
0	–$	360,000			–$	45,000
1		35,000				23,000
2		55,000				21,000
3		55,000				18,500
4		430,000				13,600

Answer 3

Consider the following two mutually exclusive projects:

  

Year	Cash Flow (A)				Cash Flow (B)
0	–$	360,000			–$	45,000
1		35,000				23,000
2		55,000				21,000
3		55,000				18,500
4		430,000				13,600