Andrea Prosper, president of Pearl Manufacturing is trying to select the best al
ID: 2715352 • Letter: A
Question
Andrea Prosper, president of Pearl Manufacturing is trying to select the best alternative from four potential investemnts. Each investment involves an initial outlay of $110,000. Their cash flows follow: Year Northeast Southeast Northwest Southwest 1 $ 20,000 $ 60,000 $ 30,000 $ - 2 25,000 35,000 $ 30,000 - 3 25,000 30,000 $ 30,000 45,000 4 45,000 - $ 30,000 65,000 5 55,000 - $ 30,000 85,000 Evaluate and rank each alternative based on a) payback period,
b) net present value (use an 11% discount rate), and
c) internal rate of return. Be sure to show your work in an excel file!
a) What is the Payback Period for for each alternative? Northeast Southeast Northwest Southwest Which alternative would you choose using the payback period?
b) What is the Net Present Value for each project using a 11% discount rate? Northeast Southeast Northwest Southwest Which alternative would you choose using the NPV using a 11% discount rate?
c) What is the IRR for each Project? Northeast Southeast Northwest Southwest Which alternative would you choose using the IRR?
Explanation / Answer
Year Discount factor @11% Northeast PV of Cash Flows Southeast PV of Cash Flows Northwest PV of Cash Flows Southwest PV of Cash Flows 0 1 (110,000) (110,000) (110,000) (110,000) (110,000) (110,000) (110,000) (110,000) 1 0.901 20,000 18,018 60,000 54,054 30,000 27,027 - - 2 0.812 25,000 20,291 35,000 28,407 30,000 24,349 - - 3 0.731 25,000 18,280 30,000 21,936 30,000 21,936 45,000 32,904 4 0.659 45,000 29,643 (30,000) (19,762) 65,000 42,818 55,000 36,230 Payback Years 3.88 2.50 3.30 payback not heppaning Ranking Payback years 3 1 2 4 NPV Northeast (23,769) Southeast (25,365) Northwest 6,129 Southwest (40,866) Ranking NPV 2 3 1 4 Year Discount factor @1.6% Northeast PV of Cash Flows 0 1 (110,000) (110,000) 1 0.984 20,000 19,685 2 0.969 25,000 24,219 3 0.953 25,000 23,837 4 0.938 45,000 42,232 NPV Northeast (27) IRR of Northeast = 1.6% Year Discount factor @-14.5%% Southeast PV of Cash Flows 0 1 (110,000) (110,000) 1 1.170 60,000 70,175 2 1.368 35,000 47,878 3 1.600 30,000 47,998 4 1.871 (30,000) (56,138) NPV Southeast (87) IRR of Southeast = -14.5% Year Discount factor @ 13.3% Northwest PV of Cash Flows 0 1 (110,000) (110,000) 1 0.883 30,000 26,478 2 0.779 30,000 23,370 3 0.688 30,000 20,627 4 0.607 65,000 39,445 NPV Northwest (80) IRR for Northeast is 13.3% Year Discount factor @ -2.65% Southwest PV of Cash Flows 0 1 (110,000) (110,000) 1 1.027 - - 2 1.055 - - 3 1.084 45,000 48,776 4 1.113 55,000 61,238 NPV Southwest 14 IRR IRR Ranking Northeast 1.60% 2 Southeast -14.50% 4 Northwest 13.30% 1 Southwest -2.65% 3 Alternative to choose on various parameters Payback NPV IRR Southeast Northwest Northwest