Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash
ID: 2778547 • Letter: C
Question
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$ 345,000 –$ 48,500 1 50,000 24,500 2 70,000 22,500 3 70,000 20,000 4 445,000 15,100 Whichever project you choose, if any, you require a 14 percent return on your investment. a-1 What 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 years Project B years 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 answers to 2 decimal places, e.g., 32.16.) Discounted payback period Project A years Project B years b-2 If you apply the discounted payback criterion, which investment will you choose? Project A Project B c-1 What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) NPV Project A $ Project B $ c-2 If you apply the NPV criterion, which investment will you choose? Project A Project B d-1 What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) IRR Project A % Project B % d-2 If you apply the IRR criterion, which investment will you choose? Project A Project B e-1 What is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.) Profitability index Project A Project B e-2 If you apply the profitability index criterion, which investment will you choose? Project A Project B f. Based on your answers in (a) through (e), which project will you finally choose?
Explanation / Answer
Year A Cumulative PV@14% Cumulative B Cumulative PV@14% Cumulative 0 -345,000 -345,000 -345000 -345000 -48,500 -48,500 -48500 -48500 1 50,000 -295,000 43859.6491 -301140.4 24,500 -24,000 21491.2281 -27008.772 2 70,000 -225,000 53862.727 -247277.6 22,500 -1,500 17313.0194 -9695.753 3 70,000 -155,000 47248.0061 -200029.6 20,000 18,500 13499.4303 3803.678 4 445,000 290,000 263475.723 63446.1 15,100 33,600 8940.41219 12744.090 NPV 63446.1057 12744.09 Payback Period 4 4 2.08 2.718 Formulae =2+(1500/20000) =2+(9695/13499)