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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:

  

YearCash Flow (A)Cash Flow (B)
0–$331,622       –$16,409         
128,900       5,372         
252,000       8,645         
355,000       13,957         
4387,000       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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