The required return on these investments is 14 percent. What is the payback peri
ID: 2719632 • Letter: T
Question
The required return on these investments is 14 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
SOLUTION :
a) PBP
Year
Cash Flow (A)
Cash Flow (B)
cumulative (A)
cumulative (B)
1
42500
20700
42500
20700
2
63500
13000
106000
33700
3
80500
20100
186500
53800
4
543000
16900
729500
70700
428000
PBP (A)
3.79
YEARS
3+(428000/543000)
PBP (B)
1.62
YEARS
1+(41500-20700)/33700
b) NPV
Year
Cash Flow (A)
Cash Flow (B)
Discount factor @14%
PV (A)
PV (B)
0
-428000
-41500
1
-428000
-41500
1
42500
20700
0.877192982
37280.7018
18157.89474
2
63500
13000
0.769467528
48861.1881
10003.07787
3
80500
20100
0.674971516
54335.2071
13566.92748
4
543000
16900
0.592080277
321499.591
10006.15669
NPV
33,976.69
10,234.06
C)
IRR
Project A =IRR(-428000,42500,63500,80500,543000)
16.58%
Project B =IRR(-41500,20700,13000,20100,16900)
25.82%
d)
profitability index = (NPV+INTIAL INVESTMENT)/INITIAL INVESTMENT
Project A (33976.69+428000)/428000
1.08
Project B (10234.06+41500)/41500
1.25
e..Project A should be selectedas it has higher NPV .
a) PBP
Year
Cash Flow (A)
Cash Flow (B)
cumulative (A)
cumulative (B)
1
42500
20700
42500
20700
2
63500
13000
106000
33700
3
80500
20100
186500
53800
4
543000
16900
729500
70700
428000
PBP (A)
3.79
YEARS
3+(428000/543000)
PBP (B)
1.62
YEARS
1+(41500-20700)/33700