Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash
ID: 1172756 • Letter: C
Question
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$308,674 –$16,230 1 27,700 5,833 2 58,000 8,577 3 51,000 13,587 4 412,000 8,448 Whichever project you choose, if any, you require a 6 percent return on your investment.
Required: (a) What is the payback period for Project A? (b) What is the payback period for Project B? (c) What is the discounted payback period for Project A? (d) What is the discounted payback period for Project B? (e) What is the NPV for Project A? (f) What is the NPV for Project B ? (g) What is the IRR for Project A? (h) What is the IRR for Project B? (i) What is the profitability index for Project A? (j) What is the profitability index for Project B?
Explanation / Answer
Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]
a) The payback period for Project A = 3 + ( $ 171,974 / $ 412,000)
= 3.417412621 Years
= 3.42 Years
Hence the correct answer is 3.42 Years
b)
The payback period for Project B = 2 + ( $ 1,820/ $ 13,587)
= 2.133951571 Years
= 2.13 Years
Hence the correct answer is 2.13 Years
c) The discounted payback period for Project A:
Discounted Payback Period =
( Last Year with a Negative Cumulative Cash Flow ) + [( Absolute Value of negative Cumulative Cash Flow in that year)/ Total Present Cash Flow in the following year)]
= 3 + ( 188,101.55/ 326,343)
= 3.57639217 Years
= 3.58 Years
Hence the correct answer is 3.58 Years
d)
The discounted payback period for Project B:
Discounted Payback Period =
( Last Year with a Negative Cumulative Cash Flow ) + [( Absolute Value of negative Cumulative Cash Flow in that year)/ Total Present Cash Flow in the following year)]
= 2+ ( $ 3,093.67/ 11,408)
= 2.271184257 Years
= 2.27 Years
Hence the correct answer is 2.27 Years
Year Investment Cash Inflow Net Cash Flow 0 -3,08,674.00 - -3,08,674.00 (Investment + Cash Inflow) 1 - 27,700 -2,80,974.00 (Net Cash Flow + Cash Inflow) 2 - 58,000 -2,22,974.00 (Net Cash Flow + Cash Inflow) 3 - 51,000 -1,71,974.00 (Net Cash Flow + Cash Inflow) 4 - 4,12,000 2,40,026.00 (Net Cash Flow + Cash Inflow)