Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash
ID: 2631018 • Letter: C
Question
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 $429,000 $42,000 1 42,000 20,800 2 64,000 12,900 3 81,000 20,600 4 544,000 17,400 The required return on these investments is 11 percent. Required: (a) What is the payback period for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Payback period Project A years Project B years (b) What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Net present value Project A $ Project B $ (c) What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) Internal rate of return Project A % Project B % (d) What is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 3 decimal places (e.g., 32.161).) Profitability index Project A Project B (e) Based on your answers in (a) through (d), which project will you finally choose?
Explanation / Answer
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 $429,000 $42,000 1 42,000 20,800 2 64,000 12,900 3 81,000 20,600 4 544,000 17,400 The required return on these investments is 11 percent.
Required:
(a) What is the payback period for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Payback period
Project A = 3 + 242000/544000 = 3.44 years
Project B = 2 + 8300/20600 = 2.40 years
(b) What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Net present value
Project A $ 78,357.83
Project B $ 13,733.13
(c) What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Internal rate of return
Project A 16.56%
Project B 25.77%
(d) What is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 3 decimal places (e.g., 32.161).)
Profitability index
Project A = 1.18
Project B = 1.33
(e) Based on your answers in (a) through (d), which project will you finally choose?
Project B
Working
Project A Year Cash Flow Cumulative PV 0 -429000 -429000 (429,000.00) 1 42000 -387000 37,837.84 2 64000 -323000 51,943.84 3 81000 -242000 59,226.50 4 544000 302000 358,349.65 NPV = 78,357.83 IRR = 16.56% PI = 1.18 Project B Year Cash Flow Cumulative PV 0 -42000 -42000 (42,000.00) 1 20800 -21200 18,738.74 2 12900 -8300 10,469.93 3 20600 12300 15,062.54 4 17400 29700 11,461.92 NPV = 13,733.13 IRR = 25.77% PI = 1.33