Consider the following two mutually exclusive projects: Whichever project you ch
ID: 2740372 • Letter: C
Question
Consider the following two mutually exclusive projects:
Whichever project you choose, if any, you required a 15% return on your investment.
(a) If you apply the payback criterion, which investment will you choose? Why?
(b) If you apply the discounted payback criterion, which investment will you choose? Why?
(c) If you apply the NPV criterion, which investment will you choose? Why?
(d) If you apply the IRR criterion, which investment will you choose? Why?
Year Cash Flow A Cash Flow B 0 -$300,000 -$40,000 1 20,000 19,000 2 50,000 12,000 3 50,000 18,000 4 390,000 10,500Explanation / Answer
ANSWER A:- PAYBACK PERIOD
Project A = upto 3 years $ 120000 is earned out of Initial Investment of $ 300000 & balance $ 180000 in4th year
project A = 3 years + 180000/390000 = 3.46year
Project B = upto 2 years $ 31000 is earned out of Initial Investment of $ 40000 & balance $ 9000 in3th year
Project B = 2years + 9000/18000 = 2.5 Years
ANSWER : Opt for Project B since it has a lower PBP
ANSWER B:- DISCOUNTED PBP
Project A = upto 3 years $ 88074.2993 is earned out of Initial Investment of $ 300000 & balance $ 211925.7007 in4th year
Project A = 3 years + 211925.7007/222983.7658 = 3.95 Years
Project B =upto 3 years $ 37430.7335 is earned out of Initial Investment of $ 40000 & balance $ 2569.2447 in4th year
Project B = 3 years + 0.43 = 3.43 years
Answer: OPt for Project B = lower discounted PBP
ANSWER C:-
Answer : Project A has higher NPV , we should opt for this.
ANSWER D:-
use excel to calculate IRR. Formula = IRR(Cell1:Cell5 )
Answer : choose project B because of higher IRR
Year Cash Flow (A) Cash Flow (B) PV Factor @ 15% Discounted Cash Flow (A) Discounted Cash Flow (B) 0 ($3,00,000) ($40,000) 1 ($3,00,000) ($40,000) 1 20,000 19,000 0.8696 17,391.3043 16,521.7391 2 50,000 12,000 0.7561 37,807.1834 9,073.7240 3 50,000 18,000 0.6575 32,875.8116 11,835.2922 4 3,90,000 10,500 0.5718 2,22,983.7658 6,003.4091