Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash
ID: 2793477 • Letter: C
Question
Consider the following two mutually exclusive projects: 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 -------------------------------------------------------------------------------- The required return on these investments is 10 percent. Required: (a) What is the payback period for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Payback period Project A years Project B years -------------------------------------------------------------------------------- (b) What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Net present value Project A $ Project B $ -------------------------------------------------------------------------------- (c) What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) Internal rate of return Project A % Project B % -------------------------------------------------------------------------------- (d) What is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 3 decimal places (e.g., 32.161).) Profitability index Project A Project B
Explanation / Answer
NPV for A=-430000+41500/(1+r)+64500/(1+r)^2+81500/(1+r)^3+545000/(1+r)^4
=-430000+41500/(1+10%)+64500/(1+10%)^2+81500/(1+10%)^3+545000/(1+10%)^4
=94507.55
Profitability Index=1+NPV/Initial Investment
=1+94507.55/430000
=1.219785
IRR is the rate at which NPV=0
=>0=-430000+41500/(1+IRR)+64500/(1+IRR)^2+81500/(1+IRR)^3+545000/(1+IRR)^4
Hence, IRR=16.544%
NPV for B=-42500+20900/(1+r)+12800/(1+r)^2+21100/(1+r)^3+17900/(1+r)^4
=-42500+20900/(1+10%)+12800/(1+10%)^2+21100/(1+10%)^3+17900/(1+10%)^4
=15157.2
Profitability Index=1+NPV/Initial Investment
=1+15157.2/42500
=1.35664
IRR is the rate at which NPV=0
=>0=-42500+20900/(1+IRR)+12800/(1+IRR)^2+21100/(1+IRR)^3+17900/(1+IRR)^4
Hence, IRR=25.729%