Consider the following two mutually exclusive projects: Cash Flow Cash Flow Year
ID: 2784846 • Letter: C
Question
Consider the following two mutually exclusive projects: Cash Flow Cash Flow Year 0 2 4 -$ 355,000 $ 47,500 23,500 21,500 19,000 14,100 40,000 60,000 60,000 435,000 Whichever project you choose, if any, you require a 15 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 Project B years 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.) Project A Project B Discounted payback period years 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 BExplanation / Answer
Project A:
CF0 = -355,000
CF1 = 40,000
CF2 = 60,000
CF3 = 60,000
CF4 = 435,000
Amount left after 3 years = -355,000 + 160,000
Amount left after 3 years = -195,000
Payback period = 3 + 195,000/ 435,000
Payback period = 3.45
Project B:
CF0 = -47,500
CF1 = 23,500
CF2 = 21,500
CF3 = 19,000
CF4 = 14,100
Amount left after 2 years = -47,500 + 23,500 + 21,500
Amount left after 2 years = -2,500
Payback period = 2 + 2,500/ 19,000
Payback period = 2.13
By payback period method, we will choose Project B
Part B
Project A
CF0 = -355,000
CF1 = 40,000/ 1.15 = 34,782.61
CF2 = 60,000/ (1.15)2 = 45,368.62
CF3 = 60,000/ (1.15)3 = 39,450.97
CF4 = 435,000
Amount left after 3 years = -355,000 + 160,000
Amount left after 3 years = -235,397.80
Discounted Payback period = 3 + 235,397.80/ 248,712.66
Discounted Payback period = 3.95
Project B
CF0 = -47,500
CF1 = 23,500/ 1.15 = 20,434.78
CF2 = 21,500/ (1.15)2 = 16,257.09
CF3 = 19,000/ (1.15)3 = 12,492.81
CF4 = 14,100
Amount left after 2 years = -47,500 + 20,434.78 + 16,257.09
Amount left after 2 years = -10,808.13
Discounted Payback period = 2 + 10,808.13/ 12,492.81
Discounted Payback period = 2.87
By Discounted payback period method, we will choose Project B