Consider the following two mutually exclusive projects: Cash Flow Cash Flow 0 34

Question

Consider the following two mutually exclusive projects: Cash Flow Cash Flow 0 348,000 1,000 47,000 24,200 67,000 22,200 67,000 19,700 4 442,000 14,800 Whichever project you choose, if any, you require a 14 percent return on your a-1What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Payback period Project a-2lf you apply the payback criterion, which investment will you choose? Project A Project B b- What is the discounted payback period for each project? (Do not round 1 intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Discounted payback Project Project b- If you apply the discounted payback criterion, which investment will you 2 choose? Project A Project B c-1What is the NPV for each project? Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Project

Explanation / Answer

As per question, the NPV and Cummulative cash flow of Project A and B are:

Project A:

Project B:

a1) Payback period of each project:

Project A: 3 + 167000/442000 = 3.38 years

   Project B: 2 + 4600/19700 = 2.24 years

a2) On the basis of the payback period, we choose investment in Project B of being low payback period.

  

b1) The discounted pay-back period (discount rate 14%):

  Project A: 3 + 210033/261664 = 3.81 years

Project B: 2 + 12704.80/13297.50 = 2.96 years

b2) On the basis of the discounted payback period, we choose investment in Project B of being low discounted payback period.

c) NPV of both project A and project B are:

Project A: $51631

Project B: $9054.30

Anderson project :

NPV : $167808

IRR : 15% + ( 1517808-1350000 / 1517808-1284317.30) (24%-15%)

= 15% + 6.47%

IRR = 21.47 %

year cash flow $ (A) cummulative cash flow $ discount rate present value $ cummu. cash flow 0 $-348000 1 -348000 1 47000 47000 0.877 41219 41219 2 67000 114000 0.769 51523 92742 3 67000 181000 0.675 45225 137967 4 $442000 623000 0.592 261664 399631 NPV $51631

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