Consider the following two mutually exclusive projects: You require a 15 percent

Question

Consider the following two mutually exclusive projects: You require a 15 percent return on your investment. Which project you will choose, if any Which investment will you choose if you use the NPV criterion? Why? Which investment will you choose if you use the IRR criterion? Why? Which investment will you choose if you use the profitability index criterion? Which investment will you choose if you use the simple payback criterion? Why? Which investment will you choose if you use the discounted payback criterion? Why? Based on your answers in (1) through (5), which project will you finally choose? Why? Faieed Corp. is evaluating a project with the following cash flows: The company uses a 10 percent interest rate on all of its projects. Calculate the MIRR of the project using all three methods.

Explanation / Answer

NPV CRITERION

NPV(1)=-350000 + 25000/(1+15)1 + 70000/(1+15)2 + 70000/(1+15)3 + 430000/(1+15)4

NPV OF PROJECT 1 =    $16,549.22

NPV(2)=-35000 + 17000/(1+15)1 + 11000/(1+15)2 + 17000/(1+15)3 + 110000/(1+15)4

NPV OF PROJECT 2 =       $5,567.25

IRR CRITERION

PROJECT 1 = -350000+ 25000/(1+IRR)1+70000/(1+IRR)2+70000/(1+IRR)3+430000/(1+IRR)4

= 16.5725%

PROJECT 2= -35000+ 17000/(1+IRR)1+11000/(1+IRR)2 +17000/(1+IRR)3+ 11000/(1+IRR)4

=23.0547%

PROFITABILITY INDEX

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