Consider the following two mutually exclusive projects: The required return on t

Question

Consider the following two mutually exclusive projects:

  
The required return on these investments is 10 percent.

a. 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.)

b. What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
  

  
c. What is the IRR for each project? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

d. 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.)

e. Based on your answers in (a) through (d), which project will you finally choose?

Year Cash Flow (A) Cash Flow (B) 0 –$ 430,000 –$ 42,500 1 41,500 20,900 2 64,500 12,800 3 81,500 21,100 4 545,000 17,900

Explanation / Answer

Project A:

Payback = 3.44

IRR = 16.54%

NPV = 94,507.55

PI = 1.22

Project B

Payback = 2.42

IRR = 25.73%

NPV = 15,157.20

PI = 1.36

choose A based on higher NPV

10.00% Cash flows Year Discounted CF        (430,000.00) 0 -430000.00            41,500.00 1 37727.27            64,500.00 2 53305.79            81,500.00 3 61232.16          545,000.00 4 372242.33

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