You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation...

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Finance

You are considering the following two mutually exclusiveprojects. Both projects will be depreciated using straight-linedepreciation to a zero book value over the life of the project.Neither project has any salvage value.

                Project A   ProjectB
Year Cash Flow Year Cash Flow
0 -$45,000   0 $-40,000
1 $17,500 1 $8,200
2 $18,000   2 $ 14,600
3 $22,500 3 $ 36,800
Required Rate of Return
Project A- 8% Project B- 12%
Required Payback Period
Project A- 2 years Project B- 2 years
Required Accounting Return
Project A 8.5% Project B- 9.5%
a. (5 points) What is the NPV for each of the projects? Whichproject should be accepted if NPV method is applied? Explainwhy.
b. (5 points) What is the IRR for each of the projects? Whichproject should be accepted if IRR method is applied? Explainwhy.
c. (5 points) What is the payback period for each of theprojects? Which project should be accepted if payback period methodis applied? Explain why.
d. (5 points) What is the discounted payback period for each ofthe projects? Which project should be accepted if discountedpayback period method is applied? Explain why.
e. (5 points) What is the profitability index for each of theprojects? Which project should be accepted if profitability indexmethod is applied? Explain why.
f. (5 points) What is the average accounting return (AAR) foreach of the projects, assuming that cash flows occurring after year0 are net income? Which project should be accepted if AAR method isapplied? Also, assume that the target AAR is 10%.
g. (5 points) Define and find the crossover rate.
h. (5 points) Sketch the NPV profile. Plot all the relevantcoordinates (i.e., the points on the x and y axis; and thecross-over rate) on the graph.

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4.1 Ratings (783 Votes)

a NPV cash inflow 1in initial investmentwhere i discount rateie 8 for project A and 12 forproject Bn periods ie 123Depreciation for project A per year 45000315000Depreciation for project B per year 40000313333approxhence cash flows after depreciation for projects areproject A year 1 175001500032500 year 2 180001500033000 year 3 225001500037500similarly for project B year 121533 year 2 27933year 350133NPV for projectA32500108330001082375001083 45000 431535similarly for project B NPV 371776According to the NPV method Project See Answer

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Transcribed Image Text

You are considering the following two mutually exclusiveprojects. Both projects will be depreciated using straight-linedepreciation to a zero book value over the life of the project.Neither project has any salvage value. Project A ProjectBYear Cash Flow Year Cash Flow0 -$45,000 0 $-40,0001 $17,500 1 $8,2002 $18,000 2 $ 14,6003 $22,500 3 $ 36,800Required Rate of ReturnProject A- 8% Project B- 12%Required Payback PeriodProject A- 2 years Project B- 2 yearsRequired Accounting ReturnProject A 8.5% Project B- 9.5%a. (5 points) What is the NPV for each of the projects? Whichproject should be accepted if NPV method is applied? Explainwhy.b. (5 points) What is the IRR for each of the projects? Whichproject should be accepted if IRR method is applied? Explainwhy.c. (5 points) What is the payback period for each of theprojects? Which project should be accepted if payback period methodis applied? Explain why.d. (5 points) What is the discounted payback period for each ofthe projects? Which project should be accepted if discountedpayback period method is applied? Explain why.e. (5 points) What is the profitability index for each of theprojects? Which project should be accepted if profitability indexmethod is applied? Explain why.f. (5 points) What is the average accounting return (AAR) foreach of the projects, assuming that cash flows occurring after year0 are net income? Which project should be accepted if AAR method isapplied? Also, assume that the target AAR is 10%.g. (5 points) Define and find the crossover rate.h. (5 points) Sketch the NPV profile. Plot all the relevantcoordinates (i.e., the points on the x and y axis; and thecross-over rate) on the graph.