Consider the following two mutually exclusive projects: Whichever project you ch
ID: 2740776 • Letter: C
Question
Consider the following two mutually exclusive projects:
Whichever project you choose, if any, you require a 6 percent return on your investment.
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?
Consider the following two mutually exclusive projects:
Explanation / Answer
Part A
To compute Payback period, we first need to compute cumulative cash flows:
Year
CF A
CCF A
0
-240255
-240255
1
26600
-213655
2
56000
-157655
3
60000
-97655
4
404000
306345
Payback period = last year of negative ccf + last negative ccf / first positive CF
= 3 + 97655 / 404000
=3.24 years
Part B
To compute Payback period, we first need to compute cumulative cash flows:
Year
CF B
CCF B
0
-15830
-15830
1
5210
-10620
2
8676
-1944
3
13983
12039
4
8903
20942
Payback period = last year of negative ccf + last negative ccf / first positive CF
= 2 +1944 / 13,983
= 2.14 years
Part C
Year
CF A
PV factor6%
PV A
CPV A
0
-240255
1
-240255
-240255.00
1
26600
0.94339623
25094.34
-215160.66
2
56000
0.88999644
49839.8
-165320.86
3
60000
0.83961928
50377.16
-114943.70
4
404000
0.79209366
320005.8
205062.14
Discounted PBP = last year of negative CPV + last negative CPV / first positive CPV
= 3 + 114943.70/ 320005.8
= 3.36 years
Part D
Year
CF B
PV factor 6%
PV B
CCF B
0
-15830
1
-15830.00
-15830.00
1
5210
0.943396226
4915.09
-10914.91
2
8676
0.88999644
7721.61
-3193.30
3
13983
0.839619283
11740.40
8547.10
4
8903
0.792093663
7052.01
15599.11
Discounted PBP = last year of negative CPV + last negative CPV / first positive CPV
= 2+ 3193.30/ 11740.40
= 2.27 years
Year
CF A
CCF A
0
-240255
-240255
1
26600
-213655
2
56000
-157655
3
60000
-97655
4
404000
306345