Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$250,000 –$35,000 1 15,000 17,000 2 40,000...

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Finance

Consider the following two mutually exclusive projects:

Year Cash Flow (A) Cash Flow (B)
0 –$250,000       –$35,000
1 15,000       17,000
2 40,000       11,000
3 55,000       20,000
4 340,000       15,000

The required return on these investments is 14 percent.

Required:
(a)
What is the payback period for each project?(Do not round intermediatecalculations. Round your answers to 2 decimalplaces (e.g., 32.16).)

Payback period
  Project A years
  Project B years

(b)
What is the NPV for each project? (Donot round intermediate calculations. Round youranswers to 2 decimal places(e.g.,32.16).)

Net present value
  Project A $
  Project B $

(c)
What is the IRR for each project? (Donot round intermediate calculations. Enter youranswer as a percentage rounded to 2 decimal places (e.g.,32.16).)

Internal rate of return
  Project A %
  Project B %

(d)
What is the profitability index for each project?(Do not round intermediatecalculations. Round your answersto 3 decimal places (e.g., 32.161).)

Profitability index
  Project A
  Project B
(e) Based only on the projects' NPV and IRR, which project shouldyou finally choose?

Answer & Explanation Solved by verified expert

3.6 Ratings (328 Votes)

a Project A Cumulative cash flow for year 0 250000 Cumulative cash flow for year 1 250000 15000 235000 Cumulative cash flow for year 2 235000 40000 195000 Cumulative cash flow for year 3 195000 55000 140000 Cumulative cash flow for year 4 140000 340000 200000 140000 340000 041 Payback period of project A 3 041 341 years Project B Cumulative cash flow for year 0 35000 Cumulative cash flow for year 1 35000 17000 See Answer

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Transcribed Image Text

Consider the following two mutually exclusive projects: YearCash Flow (A)Cash Flow (B)0–$250,000 –$35,000 115,000 17,000 240,000 11,000 355,000 20,000 4340,000 15,000 The required return on these investments is 14 percent. Required:(a)What is the payback period for each project?(Do not round intermediatecalculations. Round your answers to 2 decimalplaces (e.g., 32.16).) Payback period Project Ayears Project Byears (b)What is the NPV for each project? (Donot round intermediate calculations. Round youranswers to 2 decimal places(e.g.,32.16).) Net present value Project A$ Project B$ (c)What is the IRR for each project? (Donot round intermediate calculations. Enter youranswer as a percentage rounded to 2 decimal places (e.g.,32.16).) Internal rate of return Project A% Project B% (d)What is the profitability index for each project?(Do not round intermediatecalculations. Round your answersto 3 decimal places (e.g., 32.161).) Profitability index Project A Project B (e)Based only on the projects' NPV and IRR, which project shouldyou finally choose?

Year	Cash Flow (A)	Cash Flow (B)
0	–$250,000	–$35,000
1	15,000	17,000
2	40,000	11,000
3	55,000	20,000
4	340,000	15,000

Required:
(a)	What is the payback period for each project?(Do not round intermediatecalculations. Round your answers to 2 decimalplaces (e.g., 32.16).)

(e)	Based only on the projects' NPV and IRR, which project shouldyou finally choose?