ABC Inc. is considering two independent projects . Both projects have an initial

Question

ABC Inc. is considering two independent projects . Both projects have an initial cost of $38,000. The cash inflows of Project AA are $6,000, $10,000, $16,000 and $25,000 respectively over the next four years. The cash inflows of Project BB are $18,000, $16,000, $10,000 and $6,000 over the next four year s, respectively. The required yearly rates of return of both projects are 8%.

(a) Calculate the net present value of the two projects. (4 marks)

(b) Calculate the payback period of the two projects. (4 marks)

(c) What is the investment decision based on the net present value? Explain. (2 marks)

(d) What is the investment decision based on the payback period if the cutoff period for any project is 3 years ? Explain. (2 marks)

(e) What is the investment decision based on the IRR criterion ? Explain. (2 marks)

Explanation / Answer

Select Project AA based on NPV

Select Project BB based on Payback

Select Project BB based on IRR>

Year AA BB 0 -38,000 -38,000 1 6,000 18,000 2 10,000 16,000 3 16,000 10,000 4 25,000 6,000 NPV $7,206.01 $4,732.59 Payback 3.24 2.40 IRR 14.57% 14.62%

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