All techniques: Decision among mutually exclusive investments Pound Industries i
ID: 2383159 • Letter: A
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.
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 13%.
c. Calculate the internal rate of return (IRR) for each project.
d. Draw the net present value profiles for both projects on the same set of axes, and
discuss any conflict in ranking that may exist between NPV and IRR.
e. Summarize the preferences dictated by each measure, and indicate which project
you would recommend. Explain why.
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Explanation / Answer
Solution:
a. Payback period Cashflows Project A Project B Project C Initial Investment 60,000 100,000 110,000 Cash Inflows 20,000 31,500 32,500 Payback period Initial Investment / Cash Inflows Years 3 3.17 3.38