24 All techniques: Decision among mutually exclusive investments Pound Industrie

Question

24 All techniques: Decision among mutually exclusive investments Pound Industries is attempting to select the best of three mutually exclusive projects. The initial invest- ment and after-tax cash inflows associated with these projects are shown in the following table. Cash flows Initial investment (CFo) Cash inflows (CF), t = 1 to 5 Project AProject B 560,000$100,000 31,500 Project C $110,000 32,500 20,000 a. Calculate the payback period for each project. b. Caleulate the net present value (NPVi of each project, assuming that the firm has a cost of capital equal to 13%. c. Calculate the internal rate of return (IRR) for cach project d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR. e. Summarize the preferences dictated by cach measure, and indicate which project you would recommend. Explain why

Explanation / Answer

(a)

Working:

(b)

(c)

e.

Based on the Payback period Project A is to be accepted as it has the lowest payback period.

Based on the NPV , Project B is to be taken up as it has the highest NPV among the three projects.

Based on the IRR Project A has to be selected as it has the highest IRR.

On the basis of the above , Project A has to be taken up as it has the lowest payback period and highest IRR and the NPV is also very close to the amount for Project A.

Project A Project B Project C Payback period (years)           3.00           3.17           3.38

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