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The following two projects are mutually exclusion the firm's cost of capital is12%. The cash flow...

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Finance

The following two projects are mutually exclusion the firm'scost of capital is12%. The cash flow for each projects are given inthe following table. initial investment-60000 year CF(A) CF(B) 136000 46000 2 31500 30000 3 28500 15000 Based on NPV IRR PI Paybackperiod which project should be accepted?

Answer & Explanation Solved by verified expert
4.0 Ratings (790 Votes)

NPV =PV of Cash flows -Investment
NPV of A =-60000+36000/(1+12%)+31500/(1+12%)^2+28500/(1+12%)^3 =17540.20
NPV of B =-60000+46000/(1+12%)+30000/(1+12%)^2+15000/(1+12%)^3 =15663.95
NPV of A is more hence Project A must be selected

IRR of A can be calculated using Financial Calculator
CF0=-36000; CF1 =36000; CF2=31500;CG3=28500 CPT IRR
IRR =29.14%

CF0=-60000; CF1 =46000; CF2=30000;CG3=15000 CPT IRR
IRR of B=29.95%
Based on IRR project B should be selected

PI index of A=1+NPV/Investment =1+17540.20/60000 =1.29
PI index of B=1+NPV/Investment =1+15663.95/60000 =1.26

Based on PI index project A must be selected.

Using excel to calculate Payback Period

CF0 CF1 CF2 CF3
Cash flow -60000 36000 31500 28500
Cumulative Cash flow -60000 -24000 7500 36000
Pay Back Period 1.76 (1+24000/31500)
CF0 CF1 CF2 CF3
Cash flow -60000 46000 30000 15000
Cumulative Cash flow -60000 -14000 16000 31000
Pay Back Period 1.47 (1+14000/30000)

Based on Payback period project B must be selected.
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Transcribed Image Text

The following two projects are mutually exclusion the firm'scost of capital is12%. The cash flow for each projects are given inthe following table. initial investment-60000 year CF(A) CF(B) 136000 46000 2 31500 30000 3 28500 15000 Based on NPV IRR PI Paybackperiod which project should be accepted?

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