Consider the following two mutually exclusive projects:
Year
Cash Flow (A)
Cash Flow (B)
0
–$331,622
–$16,409
1
28,900
5,372
2
52,000...
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Finance
Consider the following two mutually exclusive projects:
Year
Cash Flow (A)
Cash Flow (B)
0
–$331,622
–$16,409
1
28,900
5,372
2
52,000
8,645
3
55,000
13,957
4
387,000
9,670
Whichever project you choose, if any, you require a 6 percentreturn on your investment.
Answer & Explanation
Solved by verified expert
3.9 Ratings (389 Votes)
Project
A
Project
B
Net
Present value
$
94,641.27
$
17,531.06
IRR
14.00%
44.89%
Payback
period
3.69 Years
2.16
Years
Profitability Index
1.29
2.20
On
the basis of net present value, Project A is acceptable. But on
other basis, project B is acceptable.The objective of capital
investment is to create money.So, Project A is acceptable.
Working:
Project A
Project B
Year
Discount
factor
Cash
flow
Present
value of cash flow
Cumulative Present value of cash flow
Cash
flow
Present
value of cash flow
Cumulative Present value of cash flow
a
b=1.06^-a
c
d=b*c
e
f=b*e
0
1.0000
$ -3,31,622.00
$ -3,31,622.00
$ -3,31,622.00
$ -14,609.00
$ -14,609.00
$ -14,609.00
1
0.9434
$
28,900.00
$
27,264.15
$ -3,04,357.85
$
5,372.00
$
5,067.92
$
-9,541.08
2
0.8900
$
52,000.00
$
46,279.81
$ -2,58,078.03
$
8,645.00
$
7,694.02
$
-1,847.06
3
0.8396
$
55,000.00
$
46,179.06
$ -2,11,898.97
$
13,957.00
$
11,718.57
$
9,871.51
4
0.7921
$ 3,87,000.00
$ 3,06,540.25
$
94,641.27
$
9,670.00
$
7,659.55
$
17,531.06
Net
Present value
$
94,641.27
$
17,531.06
IRR
=irr(C5:C9)
=irr(F5:F9)
14.00%
44.89%
Payback
period
=
3+(211898.97/306540.25)
=
2+(1847.06/11718.57)
=
3.69
=
2.16
Cumulative resent value of cash inflow
$
94,641.27
$
17,531.06
Initial
Investment
$ 3,31,622.00
$
14,609.00
Present
value of cash inflow
$ 4,26,263.27
$
32,140.06
Initial
Investment
$ 3,31,622.00
$
14,609.00
Profitability index
1.29
2.20
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