The required return on these investments is 12 percent. What is the payback peri
ID: 2651555 • Letter: T
Question
The required return on these investments is 12 percent.
What is the payback period for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
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).)
What is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 3 decimal places (e.g., 32.161).)
Consider the following two mutually exclusive projects:Explanation / Answer
Answer:
(a)
Calculation of Payback Period
Year
Cash Flow (A)
Cummulative
Cash Flow (B)
Cummulative
Cash Flow (A)
Cash Flow (B)
0
$ (421,000.00)
$ (421,000.00)
$ (38,000.00)
$ (38,000.00)
1
$ 46,000.00
$ (375,000.00)
$ 20,000.00
$ (18,000.00)
2
$ 60,000.00
$ (315,000.00)
$ 13,700.00
$ (4,300.00)
3
$ 77,000.00
$ (238,000.00)
$ 16,600.00
$ 12,300.00
4
$ 536,000.00
$ 298,000.00
$ 13,400.00
$ 25,700.00
PBP = 3 years + 1*(238000/536000) = 3.44 Years
PBP = 2 years + 1*(4300/16600) = 2.26 Years
(b)
Calculation of Net Present value
Year
Cash Flow (A)
Cash Flow (B)
PVF (12%)
PV (A)
PV (B)
Calculation
PVF
Cash flow (A) *PVF
Cash flow (B) *PVF
0
$ (421,000.00)
$ (38,000.00)
1/(1+0.12)^0
1.00000
$ (421,000.00)
$ (38,000.00)
1
$ 46,000.00
$ 20,000.00
1/(1+0.12)^1
0.89286
$ 41,071.43
$ 17,857.14
2
$ 60,000.00
$ 13,700.00
1/(1+0.12)^2
0.79719
$ 47,831.63
$ 10,921.56
3
$ 77,000.00
$ 16,600.00
1/(1+0.12)^3
0.71178
$ 54,807.08
$ 11,815.55
4
$ 536,000.00
$ 13,400.00
1/(1+0.12)^4
0.63552
$ 340,637.69
$ 8,515.94
Ner Present Value (Sum of PVs)
$ 63,347.83
$ 11,110.19
(c)
Calculation of IRR
Year
Cash Flow (A)
Cash Flow (B)
0
$ (421,000.00)
$ (38,000.00)
1
$ 46,000.00
$ 20,000.00
2
$ 60,000.00
$ 13,700.00
3
$ 77,000.00
$ 16,600.00
4
$ 536,000.00
$ 13,400.00
IRR
16.69%
26.19%
(d)
Calculation of Profitability Index
Year
Cash Flow (A)
Cash Flow (B)
PVF (12%)
PV (A)
PV (B)
Calculation
PVF
Cash flow (A) *PVF
Cash flow (B) *PVF
Cash Inflows
1
$ 46,000.00
$ 20,000.00
1/(1+0.12)^1
0.89286
$ 41,071.43
$ 17,857.14
2
$ 60,000.00
$ 13,700.00
1/(1+0.12)^2
0.79719
$ 47,831.63
$ 10,921.56
3
$ 77,000.00
$ 16,600.00
1/(1+0.12)^3
0.71178
$ 54,807.08
$ 11,815.55
4
$ 536,000.00
$ 13,400.00
1/(1+0.12)^4
0.63552
$ 340,637.69
$ 8,515.94
Present value of cash inflows (PVCI)
$ 484,347.83
$ 49,110.19
Cash outflows
0
$ 421,000.00
$ 38,000.00
1/(1+0.12)^0
1.00000
$ 421,000.00
$ 38,000.00
Present value of cash Outflows (PVCO)
$ 421,000.00
$ 38,000.00
Profitability Index = PVCI /PVCO
1.150
1.292
(e)
The best criteria to decide the project is NPV and NPV of project A is Higher, hence project A should be accepted
(a)
Calculation of Payback Period
Year
Cash Flow (A)
Cummulative
Cash Flow (B)
Cummulative
Cash Flow (A)
Cash Flow (B)
0
$ (421,000.00)
$ (421,000.00)
$ (38,000.00)
$ (38,000.00)
1
$ 46,000.00
$ (375,000.00)
$ 20,000.00
$ (18,000.00)
2
$ 60,000.00
$ (315,000.00)
$ 13,700.00
$ (4,300.00)
3
$ 77,000.00
$ (238,000.00)
$ 16,600.00
$ 12,300.00
4
$ 536,000.00
$ 298,000.00
$ 13,400.00
$ 25,700.00
PBP = 3 years + 1*(238000/536000) = 3.44 Years
PBP = 2 years + 1*(4300/16600) = 2.26 Years
(b)
Calculation of Net Present value
Year
Cash Flow (A)
Cash Flow (B)
PVF (12%)
PV (A)
PV (B)
Calculation
PVF
Cash flow (A) *PVF
Cash flow (B) *PVF
0
$ (421,000.00)
$ (38,000.00)
1/(1+0.12)^0
1.00000
$ (421,000.00)
$ (38,000.00)
1
$ 46,000.00
$ 20,000.00
1/(1+0.12)^1
0.89286
$ 41,071.43
$ 17,857.14
2
$ 60,000.00
$ 13,700.00
1/(1+0.12)^2
0.79719
$ 47,831.63
$ 10,921.56
3
$ 77,000.00
$ 16,600.00
1/(1+0.12)^3
0.71178
$ 54,807.08
$ 11,815.55
4
$ 536,000.00
$ 13,400.00
1/(1+0.12)^4
0.63552
$ 340,637.69
$ 8,515.94
Ner Present Value (Sum of PVs)
$ 63,347.83
$ 11,110.19
(c)
Calculation of IRR
Year
Cash Flow (A)
Cash Flow (B)
0
$ (421,000.00)
$ (38,000.00)
1
$ 46,000.00
$ 20,000.00
2
$ 60,000.00
$ 13,700.00
3
$ 77,000.00
$ 16,600.00
4
$ 536,000.00
$ 13,400.00
IRR
16.69%
26.19%
(d)
Calculation of Profitability Index
Year
Cash Flow (A)
Cash Flow (B)
PVF (12%)
PV (A)
PV (B)
Calculation
PVF
Cash flow (A) *PVF
Cash flow (B) *PVF
Cash Inflows
1
$ 46,000.00
$ 20,000.00
1/(1+0.12)^1
0.89286
$ 41,071.43
$ 17,857.14
2
$ 60,000.00
$ 13,700.00
1/(1+0.12)^2
0.79719
$ 47,831.63
$ 10,921.56
3
$ 77,000.00
$ 16,600.00
1/(1+0.12)^3
0.71178
$ 54,807.08
$ 11,815.55
4
$ 536,000.00
$ 13,400.00
1/(1+0.12)^4
0.63552
$ 340,637.69
$ 8,515.94
Present value of cash inflows (PVCI)
$ 484,347.83
$ 49,110.19
Cash outflows
0
$ 421,000.00
$ 38,000.00
1/(1+0.12)^0
1.00000
$ 421,000.00
$ 38,000.00
Present value of cash Outflows (PVCO)
$ 421,000.00
$ 38,000.00
Profitability Index = PVCI /PVCO
1.150
1.292
(e)
The best criteria to decide the project is NPV and NPV of project A is Higher, hence project A should be accepted