Consider the following two mutually exclusive projects Whichever project you cho
ID: 2778704 • Letter: C
Question
Consider the following two mutually exclusive projects Whichever project you choose if any you require a 15 percent return on your investment. 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.) If you apply the discounted payback criterion which investment will you choose? What Is the NPV for each project? (Do not round Intermediate calculations and round your answers to 2 decimal places, e.g.. 32.16.) If you apply the NPV criterion which investment will you choose? 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.) If you apply the IRR criterion which investment will you choose? What is the profitably index for each project? (Do not round Intermediate calculations and round your answers to 3 decimal places, e.g.. 32.161.) If you apply the profitability Index criterion which Investment will you choose? Based on your answers in (a) through (e). which project will you finally choose?Explanation / Answer
The required table is as below
Year
15% factor
Project A
Project B
NCF
PV of NCF
NPV
NCF
PV of NCF
NPV
0
1
-344,000
-344,000
-344,000
-49,000
-49,000
-49,000
1
0.8696
51,000
44,349.6
-299,650.4
24,600
21,392.16
-27,607.84
2
0.7561
71,000
53,683.1
-245,967.3
22,600
17,087.86
-10,519.98
3
0.6575
71,000
46,682.5
-199,284.8
20,100
13,215.75
2,695.77
4
0.5718
446,000
255,022.8
55,738.0
15,200
8,691.36
11,387.13
b-1.
Discounted payback period:
Project A: 3 years + a fraction of the 4th year
= 3 years + (199,284.8 / 255,022.8)
= 3.78 years
Project B: 2 years + a fraction of the 3rd year
= 2 years + (10,519.98 / 13,215.75)
= 2.80 years
b-2.
Based on discounted payback period project B should be chosen, since it has smaller recovery period.
c-1.
NPV of Project A = $55,738
NPV of project B = $11,387.13
c-2.
Based on NPV project A should be chosen, since it has greater returns.
Year
15% factor
Project A
Project B
NCF
PV of NCF
NPV
NCF
PV of NCF
NPV
0
1
-344,000
-344,000
-344,000
-49,000
-49,000
-49,000
1
0.8696
51,000
44,349.6
-299,650.4
24,600
21,392.16
-27,607.84
2
0.7561
71,000
53,683.1
-245,967.3
22,600
17,087.86
-10,519.98
3
0.6575
71,000
46,682.5
-199,284.8
20,100
13,215.75
2,695.77
4
0.5718
446,000
255,022.8
55,738.0
15,200
8,691.36
11,387.13