Consider the following two mutually exclusive projects: YearCash Flow (A)Cash Fl
ID: 2738490 • Letter: C
Question
Consider the following two mutually exclusive projects:
YearCash Flow (A)Cash Flow (B)0–$207,253 –$16,289 129,600 5,383 259,000 8,576 359,000 13,812 4412,000 9,536
Whichever project you choose, if any, you require a 6 percent return on your investment. Required: (a) What is the payback period for Project A? (b) What is the payback period for Project B? (c) What is the discounted payback period for Project A? (d) What is the discounted payback period for Project B? (e) What is the NPV for Project A? (f) What is the NPV for Project B ? (g) What is the IRR for Project A? (h) What is the IRR for Project B? (i) What is the profitability index for Project A? (j) What is the profitability index for Project B?
Explanation / Answer
(a)
Calculation of the payback period for project A:
Payback period = $129,600 + ($77,653/$259,000)*12
= One year and 3.60 months
(b)
Calculation of the payback period for project B:
Payback period = $5,383 + $8,576 + ($2,330 / $13,812)*12
= Two years and 2.02 months.
(c )
Calculation of discounted payback period for project A:
Year
Project A
Discounting
factor @6%
Discounted
cash flows
0
$ (207,253)
1
$ (207,253)
1
$ 129,600
0.94340
$ 122,265
2
$ 259,000
0.88999
$ 230,507
Payback period = $122,265 + ($84,988 / $230,507)*12
= one year and 4.42 months.
(d)
Calculation of discounted payback period for project B:
Year
Project B
Discounting
factor @6%
Discounted
cash flows
0
$ (16,289)
1
$ (16,289)
1
$ 5,383
0.94340
$ 5,078
2
$ 8,576
0.88999
$ 7,633
3
$ 13,812
0.83962
$ 11,597
Payback period = $5,078 + $7,633 + ($3,578 / $11,597)*12
= two years and 3.7 months.
(e)
Calculation of NPV for Project A:
Year
Project A
Discounting
factor @6%
Discounted
cash flows
0
$ (207,253)
1
$ (207,253)
1
$ 129,600
0.94340
$ 122,265
2
$ 259,000
0.88999
$ 230,507
3
$ 359,000
0.83962
$ 301,424
4
$ 412,000
0.79209
$ 326,341
NPV
$ 773,284
(f)
Calculation of the NPV for Project B:
Year
Project B
Discounting
factor @6%
Discounted
cash flows
0
$ (16,289)
1
$ (16,289)
1
$ 5,383
0.94340
$ 5,078
2
$ 8,576
0.88999
$ 7,633
3
$ 13,812
0.83962
$ 11,597
4
$ 9,536
0.79209
$ 7,553
NPV
$ 15,572
(g)
Calculate the IRR for project A:
Year
Project A
0
$ (207,253)
1
$ 129,600
2
$ 259,000
3
$ 359,000
4
$ 412,000
Using financial calculators IRR for project A is 96.82%
(h)
Calculate the IRR for project B:
Year
Project B
0
$ (16,289)
1
$ 5,383
2
$ 8,576
3
$ 13,812
4
$ 9,536
Using financial calculators IRR for project B is 38.00%.
Year
Project A
Discounting
factor @6%
Discounted
cash flows
0
$ (207,253)
1
$ (207,253)
1
$ 129,600
0.94340
$ 122,265
2
$ 259,000
0.88999
$ 230,507