Question

William Industries is attempting to choose the better of two mutually exclusive

projects for expanding the firm’s production capacity. The relevant cash flows for

the projects are shown in the following table. The firm’s cost of capital is 15%.

	PROJECT B	PROJECT C
YEAR	Cash Flow	Cash Flow
0	350000	50000
1	45000	24000
2	65000	22000
3	65000	19500
4	440000	14600

a) Calculate the period back of each project, assess its acceptability, and indicate

which project is best, using the payback period.

(b) Calculate the net present value (NPV) of each project, assess its acceptability,

and indicate which project is best, using the NPV.

(c) Calculate the profitability index (PI) of each project, assess its acceptability,

and indicate which project is best, using the PI.

(d) Which of the two mutually exclusive projects would you recommend that

William Industries undertake? Why?

Answer 1

Formulas Used:-

YEAR	PROJECT B	PROJECT C	Incremental
0	350000	50000	=C23-D23
1	45000	24000	=C24-D24
2	65000	22000	=C25-D25
3	65000	19500	=C26-D26
4	440000	14600	=C27-D27
Payback Period	=3+((C23-SUM(C24:C26))/C27)	=2+4000/D26
NPV	=NPV(15%,C24:C27)-C23	=NPV(15%,D24:D27)-D23	=NPV(15%,E24:E27)-E23
PI	=NPV(15%,C24:C27)/C23	=NPV(15%,D24:D27)/D23	=NPV(15%,E24:E27)/E23

So, Project A Should be selected because it have higher NPV and it also have pased the Incremental Analysis.