All techniques- Decision among mutually exclusive investments Pound Industries i
ID: 2658082 • 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. Cash flows Initial investment (CF) Cash inflows (CF), t-1 to 5 Project C $120,000 $140,000 $150,000 $47,000 Project A $35,000 $46,500 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 12%. c. Calculate the internal rate of return (IRR) for each project. d. Indicate which project you would recommend.Explanation / Answer
Project A
Project B
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 12%
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 12%
0
-120000
-120000
0
-140000
-140000
1
35000
31250
1
46500
41517.86
2
35000
27901.79
2
46500
37069.52
3
35000
24912.31
3
46500
33097.78
4
35000
22243.13
4
46500
29551.59
5
35000
19859.94
5
46500
26385.35
NPV
sum of present value of cash flow
6167.167
NPV
sum of present value of cash flow
27622.09
IRR
Using IRR function in MS excel
14.05%
IRR
Using IRR function in MS excel
19.70%
Payback period
initial investment/annual cash flow
3.43
Payback period
initial investment/annual cash flow
3.01
Project C
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 12%
0
-150000
-150000
1
47000
41964.29
2
47000
37468.11
3
47000
33453.67
4
47000
29869.35
5
47000
26669.06
NPV
sum of present value of cash flow
19424.48
IRR
Using IRR function in MS excel
17.11%
Payback period
initial investment/annual cash flow
3.19
Project
A
B
C
Final selection on the basis of capital budgeting technique
NPV
6167.167
27622.09
19424.48
Project B
Because NPV is highest
IRR
14.05%
19.70%
17.11%
Project B
Because IRR is highest
Payback period
3.43
3.01
3.19
Project B
Because PBP is lowest
Project A
Project B
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 12%
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 12%
0
-120000
-120000
0
-140000
-140000
1
35000
31250
1
46500
41517.86
2
35000
27901.79
2
46500
37069.52
3
35000
24912.31
3
46500
33097.78
4
35000
22243.13
4
46500
29551.59
5
35000
19859.94
5
46500
26385.35
NPV
sum of present value of cash flow
6167.167
NPV
sum of present value of cash flow
27622.09
IRR
Using IRR function in MS excel
14.05%
IRR
Using IRR function in MS excel
19.70%
Payback period
initial investment/annual cash flow
3.43
Payback period
initial investment/annual cash flow
3.01
Project C
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 12%
0
-150000
-150000
1
47000
41964.29
2
47000
37468.11
3
47000
33453.67
4
47000
29869.35
5
47000
26669.06
NPV
sum of present value of cash flow
19424.48
IRR
Using IRR function in MS excel
17.11%
Payback period
initial investment/annual cash flow
3.19
Project
A
B
C
Final selection on the basis of capital budgeting technique
NPV
6167.167
27622.09
19424.48
Project B
Because NPV is highest
IRR
14.05%
19.70%
17.11%
Project B
Because IRR is highest
Payback period
3.43
3.01
3.19
Project B
Because PBP is lowest