The required return on these investments is 14 percent. What is the payback peri
ID: 2751123 • 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
a) Payback Period
Project A = 3 + [(428000 - 42500 - 63500 - 80500)]/543000 = 3 + 241500/543000 = 3 + 0.44 = 3.44 years
Project B = 2 + [(41500 - 20700 -13000)]/20100 = 2 + 7800/20100 = 2 + 0.39 = 2.39 years
b) NPV is the sum of dicounted cash flows which is calculated in the table
Project A = $33976.69
Project B = $10234.06
c) IRR can ne calculated using the IRR function of excel. The values have been calculated in the table itseld.
Project A = 16.58%
Project B = 25.82%
d) Profitability Index = 1 + NPV/Initial Investment
Project A = 1 + 33976.69/428000 = 1 + 0.079 = 1.079
Project B = 1 + 10234.06/41500 = 1 + 0.247 = 1.247
Year Cash Flow (A) Discounted Cash Flow (A) Cash Flow (B) Discounted Cash Flow (B) 0 -428000.00 -428000.00 -41500.00 -41500.00 1 42500.00 37280.70 20700.00 18157.89 2 63500.00 48861.19 13000.00 10003.08 3 80500.00 54335.21 20100.00 13566.93 4 543000.00 321499.59 16900.00 10006.16 NPV (A) 33976.69 NPV (B) 10234.06 IRR (A) 16.58% IRR (B) 25.82%