Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash

Question

Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$ 350,000 –$ 50,000 1 45,000 24,000 2 65,000 22,000 3 65,000 19,500 4 440,000 14,600 Whichever project you choose, if any, you require a 15 percent return on your investment. a-2 If you apply the payback criterion, which investment will you choose?

Project A Project B b-1 What is the discounted payback period for each project? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Let us first write the cashflows and try to create the NP to check whether NPV is positive for any one of the projects

As NPV is positive for both we should accept both but IRR is greater for Project A

Pay back period for both project = 145000/145000 + 205000/265000 = 1.77 years

Pay back period for project B= 1 + 1+.08 =2.08

Therrefore project A has lesser payback period hence choose project A

Consiering 15% Let us calculate discounted Pay Back Period

Payabck period for cashflows

For Project A = 1.9717

For project B =2.5128

Cashflow A Cashflows B -3,50,000 -50000 145000 24000 265000 22000 365000 19500 4440000 14600 NPV 23,95,689.45 7,542.51 IRR 119% 24%

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