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Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$ 364,000 –$ 52,000 1 46,000 25,000 2 68,000 22,000 3 68,000 21,500 4 458,000 17,500
Whichever project you choose, if any, you require a return of 11 percent on your investment.
1. What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
2. If you apply the payback criterion, which investment will you choose?
a. Project A
b. Project B
3. What is the discounted payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
4. If you apply the discounted payback criterion, which investment will you choose?
a. Project A
b. Project B
5. What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
6. If you apply the NPV criterion, which investment will you choose?
a. Project A
b. Project B
7. What is the IRR for each project? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
8. If you apply the IRR criterion, which investment will you choose?
a. Project A
b. Project B
9. What is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.)
10. If you apply the profitability index criterion, which investment will you choose?
a. Project A
b. Project B
11. Based on your answers in (a) through (e), which project will you finally choose?
a. Project A
b. Project B

Answer :

truonghanhduyen

Answer:

Please see excel attached for the calculation

1. Payback period:

Project A: 3.4 years

Project B: 2.23 years

2. If applying the payback criterion, I will choose Project B

3. discounted payback period:

Project A: 3.72 years

Project B: 2.74 year

4. If applying the discounted payback criterion, I will choose Project B

5. NPV:

Project A is $75,722

Project B is $14,078

6. If applying the NPV criterion, I will choose Project A

7. IRR:

Project A is 18%

Project B is 25%

8. If applying the IRR criterion, I will choose Project B

9. Profitability  Index  = present value of future cash flow/ initial investment

Project A: 1.23

Project B: 1.30

10. If applying the Profitability  Index criterion, I will choose Project B

11. Choose Project B because it's have 4 in 5 criterion better than Project A

Explanation:

Year 0 1 2 3 4

Project A  $(364,000)  $46,000   $68,000   $68,000   $458,000  

Project B  $(52,000)  $25,000   $22,000   $215,000   $175,000  

1. Pay back period:

Project A: break even in year 4 because cash in year 1, 2, 3 = $46,00 + $68,000 + $68,000 = $182,000 < total investment $364,000

payback period = 3 years + (total investment - sum of cash in year 1, 2, 3)/ cash in year 4 = 3 + (364,000 - 182,000)/458,000 = 3.4 years

Project B: break even in year 3 because cash in year 1, 2  =$25,000+$22,000= $47,000 < total investment $52,000

payback period = 2 years + (total investment - sum of cash in year 1, 2)/ cash in year 3 = 2 + (52,000 - 47000)/215,000 = 2.23 years

2. Choose Project B because payback period is shorter

3. We have to calculate present value of cash flow to have Discounted Cashflow as below:

Project A  $(364,000)  $41,441   $55,190   $49,721   $301,699  

Project B   $(52,000)  $22,523   $17,856   $15,721  $11,528  

Same as above, we can calculate discounted payback period:

Project A: 3.72 years

Project B: 2.74 year

4. Choose project B because discounted back back is shorter

5. We can use excel to calculate net present value of project = NPV (rate,cash from year 0-year 4)

Project A is $75,722

Project B is $14,078

6. Choose Project A because NPV is higher

7. We can use excel to calculate internal Rate of return (IRR) of project = IRR(cash from year 0-year 4)

Project A is 18%

Project B is 25%

8. Choose Project B because IRR is higher

9. Profitability  Index  = present value of future cash flow/ initial investment

Project A: 1.23

Project B: 1.30

10. Choose Project B because Profitability  Index is higher

11. Choose Project B because it's have 4 in 5 criterion better than Project A

${teks-lihat-gambar} truonghanhduyen

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