Vertex Ltd. has two potential projects with the following net cash flows. The firm’s hurdle...
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Vertex Ltd. has two potential projects with the following net cash flows. The firm’s hurdle rate is 15%. (PV of $1 = 0.870, PVIFA of $1 = 2.855, FV of $1 = 1.150, FVA of $1 = 3.625)
Year | Project C Cash Flow | Project D Cash Flow |
0 | $(700,000) | $(500,000) |
1 | $200,000 | $150,000 |
2 | $250,000 | $200,000 |
3 | $300,000 | $250,000 |
4 | $350,000 | $280,000 |
5 | $180,000 | $320,000 |
a. Compute the payback period for both projects. Which project is more favorable based on the payback period?
b. Compute the net present value for each project. Based on the net present value, which project is preferable?
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