Question

Part 2. Consider the following two mutually exclusive projects:

Year	Cash Flow (A)	Cash Flow (B)
0	- $ 300,000	- $40,000
1	20,000	19,000
2	50,000	12,000
3	50,000	18,000
4	390,000	10,500

Whichever project you choose, if any, you require a 15 percent return on your investment.

a. If you apply the payback criterion, which investment will you choose? Why?

b. If you apply the discounted payback criterion, which investment will you choose? Why?

c. If you apply the NPV criterion, which investment will you choose? Why?

d. If you apply the IRR criterion, which investment will you choose? Why?

e. If you apply the profitability index criterion, which investment will you choose? Why?

f. Based on your answers in (a) through (e), which project will you finally choose? Why?

Answer 1

1.
Payback of A=3+(300000-20000-50000-50000)/390000=3.4615

Payback of B=2+(40000-19000-12000)/18000=2.5000

Choose B

2.
Discounted Payback of A=3+(300000-20000/1.15-50000/1.15^2-50000/1.15^3)/(390000/1.15^4)=3.950408654

Discounted Payback of B=3+(40000-19000/1.15-12000/1.15^2-18000/1.15^3)/(10500/1.15^4)=3.427964286

Choose B

3.
NPV of A=-300000+20000/1.15+50000/1.15^2+50000/1.15^3+390000/1.15^4=11058.0651

NPV of B=-40000+19000/1.15+12000/1.15^2+18000/1.15^3+10500/1.15^4=3434.1644

Choose A

4.
IRR of A=IRR({-300000;20000;50000;50000;390000})=16.20%

IRR of B=IRR({-40000;19000;12000;18000;10500})=19.50%

Choose B

5.

PI of A=1+11058.0651/300000=1.036860217

PI of B=1+3434.1644/40000=1.08585411

Choose B

6.

Choose A