Question

Marge Simpson Inc. has following business opportunities with following cash flow information. Assume Marge’s opportunity cost of capital is 12%.

Year |
Project A |
Project B |

0 |
−$20,000 |
−$20,000 |

1 |
15,000 |
2,000 |

2 |
15,000 |
2,500 |

3 |
13,000 |
3,000 |

4 |
3,000 |
50,000 |

- Calculate profitability index for both projects.
- Calculate payback period for both projects.

Answer #1

profitability index = Total Present value of Cash Inflows/ otal Present value of Cash Outflows

Year | Cash Flow Project A ($) | PVIF @ 12% | PV Project A ( Cash Flow * PVIF) ($) | Cash Flow Project B ($) | PV Project B ( Cash Flow * PVIF) ($) |

0 | -20000 | 1 | -20000 | -20000 | -20000 |

1 | 15000 | .893 | 13395 | 2000 | 1786 |

2 | 15000 | .797 | 11955 | 2500 | 1992.50 |

3 | 13000 | .712 | 9256 | 3000 | 2136 |

4 | 3000 | .636 | 1908 | 50000 | 31800 |

PI of A = (13395+11955+9256+1908)/20000

= 1.83

PI of B = (1786+1992.50+2136+31800) / 20000

=1.89

Payback Period

Project A

Initial Outlay = $ 20,000

Cash flow for 3 years = $ 7500

Balance Outlay = 20000-7500 = 12,500

cash Flow for year 4= 50000

Therefore, payback period = 3 year + 12500/50000

=3.25 years

Project B

Initial Outlay = $ 20,000

Cash flow for 1 year = $ 15,000

Balance Outlay = 20000-15000 = 5000

cash Flow for year 2= 15000

Therefore, payback period = 1 year + 5000/15000

=1.33 years

Marge Simpson Inc. has following business opportunities with
following cash flow information. Assume Marge’s opportunity cost of
capital is 12%.
Year
Project A
Project B
0
−$20,000
−$20,000
1
15,000
2,000
2
15,000
2,500
3
13,000
3,000
4
3,000
50,000
Calculate payback period for both projects.

Marge Simpson Inc. has following business opportunities with
following cash flow information. Assume Marge’s opportunity cost of
capital is 12%.
Year
Project A
Project B
0
−$20,000
−$20,000
1
15,000
2,000
2
15,000
2,500
3
13,000
3,000
4
3,000
50,000
Calculate NPV for both projects.
Calculate IRR for both projects (Hint: the equation of
calculating IRR).
Calculate profitability index for both projects.
Calculate payback period for both projects.
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point=14.1%. (Hint:...

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Accounting rate of
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Net Present
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Profitability
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And recommend acceptance or rejection of projects considering
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Project A
Project B
Initial outlay
$50,000
$100,000
Cash inflows
Year 1
$10,000
$ 25,000
Year 2
15,000
25,000
Year 3
20,000
25,000
Year 4
25,000
25,000...

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Year
Project Alpha
Project Beta
0
?$
5,300
?$
6,900
1
2,700
1,550
2
2,600
5,300
3
1,650
4,400
a. Compute the profitability index for each of the two
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Year
Cash Flow (A)
Cash Flow (B)
0
–$40,000
–$180,000
1
25,000
15,000
2
22,000
45,000
3
20,000
50,000
4
15,000
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Required:
(a)
What is the payback period for each project?
(Do not round intermediate
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Payback period
Project A
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Project B
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Suppose the following two independent investment opportunities
are available to Greene, Inc. The appropriate discount rate is 12
percent.
Year
Project Alpha
Project Beta
0
−$
4,300
−$
5,900
1
2,200
1,300
2
2,100
4,300
3
1,400
3,900
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(Do not round intermediate calculations and round your
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Project Beta
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Year cash flow
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4 20,000
Which of the following is closest to the project’s payback
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0
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($20,000)
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15,000
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15,000
6,000
3
15,000
6,000
4
13,500
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1
20,000
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2
50,000
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