Consider the following two mutually exclusive projects: Assume you require a 13
ID: 2758614 • Letter: C
Question
Consider the following two mutually exclusive projects:
Assume you require a 13 percent return on your investment. Use the formula approach to answer the following questions: If you apply the payback criterion, which investment will you choose? Why? Show your work. If you apply the discounted payback criterion, which investment will you choose? Why? Show your work. If you apply the NPV criterion, which investment will you choose? Why? Show your work. If you apply the IRR criterion, which investment will you choose? Why? Show your work. If you apply the profitability index criterion, which investment will you choose? Why? Show your work. Based on your answers in (a) through (e), which project will you finally choose? Why?
Explanation / Answer
All Amounts in $ a. Based on the payback method Payback for Project A = 3 years 5 months Payback for Project B = 2.5 years Based on this method, Project B needs to be chosen. b. Based on the discounted payback method Discounted Payback for Project A = 3.87 years Discounted Payback for Project B = 3.2 years Based on the discounted payback method also, Project B needs to be chosen. c. The Net Present Values of both the projects, based on the information given, are calculated as follows : Project A $ 27,171.03 Project B $ 4,536.88 Based on the Net Present Value analysis, Project A needs to be chosen. d. The IRR working for both the projects, based on the information given, is calculated as under: IRR for Project A 16.20% IRR for Project B 19.50% Based on the IRR Working, Project B needs to be chosen. e. The Profitability Index for both the projects is as under : Project A -1.1023 Project B -1.1282 Based on the profitability index working, Project A needs to be chosen. However, on an overall analysis from points a to e, it is clear that Project B has a clear advantage over Project A, hence that should be the final choice.