Please help me step by step! Thank you very much! 17. Comparing Investment Crite
ID: 2566741 • Letter: P
Question
Please help me step by step! Thank you very much!
17. Comparing Investment Criteria (LO1, 2, 3, 5, 7) Consider the following two mutually exclusive projects Year Cash Flow (A) Cash Flow (B) $50,000 24,000 22,000 19,500 14,600 -$350,000 45,000 65,000 65,000 440,000 Click here for a description of Table: Questions and Problems 17 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? Why? b. If you apply the discounted payback criterion, which investment will you choose? Why? c. If you apply the NPV criterion, which investment will you choose? Why? d. If you apply the IRR criterion, which investment will you choose? Why? e. If you apply the profitability index criterion, which investment will you choose? Why? f. Based on your answers in (a) through (e), which project will you finally choose? Why?Explanation / Answer
Payback period
Project A
Payback period = 3 + $175000 / $440000
= 3.40 years
Project B
Payback period = 2 + $4000 / $19500
= 2.20 years
Discounted payback period:
Discounted payback period :
Project A = 3 + 0.87
= 3.87 years
Project B = 2 + 0.97
= 2.97 years.
NPV:
Project A = $32608
Project B = $8673
Profitability index = PV of cash inflows / PV of cash outflows
Project A = $382608 / $350000
= 1.09
Project B = $58673 / $50000
= 1.17.
Year Project A Cummulative cash flows Project B Cummulative cash flows 1 $45000 $45000 $24000 $24000 2 $65000 $110000 $22000 $46000 3 $65000 $175000 $19500 $65500 4 $440000 $615000 $14600 $80100