A. X-treme Vitamin Company is considering two investments, both of which cost $20,000. The firm’s cost...

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A. X-treme Vitamin Company is considering two investments, bothof which cost $20,000. The firm’s cost of capital is 15 percent.The cash flows are as follows:
Year Project A Project B
1 12000 10000
2 8000 6000
3 6000 16000

(a) What is the payback period for each project? Which projectwould you accept based on the payback period?
(b) What is the discounted payback for each project? Which projectwould you accept based on the discounted payback criterion?
(c) Calculate the NPV of each project? Which project would youchoose based on the NPV criterion?
(d) Based on the IRR criteria which project would you choose ifthey were mutually exclusive? Show all the workings.

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3.8 Ratings (580 Votes)

a Project A Year Cash flow stream Cumulative cash flow 0 20000 20000 1 12000 8000 2 8000 0 3 6000 6000 Payback period is the time by which undiscounted cashflow cover the intial investment outlay this is happening at the end of year 2 therefore payback period is 2 Years Project B Year Cash flow stream Cumulative cash flow 0 20000 20000 1 10000 10000 2 6000 4000 3 16000 12000 Payback period is the time by which undiscounted cashflow cover the intial investment outlay this is happening between year 2 and 3 therefore by interpolation payback period 2 04000120004000 225 Years Select Project A as it has smaller payback period b Project A Discount rate 1500 Year Cash flow stream Cumulative cash See Answer

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A. X-treme Vitamin Company is considering two investments, bothof which cost $20,000. The firm’s cost of capital is 15 percent.The cash flows are as follows:YearProject AProject B112000100002800060003600016000(a) What is the payback period for each project? Which projectwould you accept based on the payback period? (b) What is the discounted payback for each project? Which projectwould you accept based on the discounted payback criterion? (c) Calculate the NPV of each project? Which project would youchoose based on the NPV criterion? (d) Based on the IRR criteria which project would you choose ifthey were mutually exclusive? Show all the workings.