Use the cash flows from the following two projects to answer the questions below
ID: 2619922 • Letter: U
Question
Use the cash flows from the following two projects to answer the questions below. The firms required rate of return is 11%. Make sure to show all your computations.
Year
Project A
Project B
0
-$200,000
-$200,000
1
$80,000
$100,000
2
$80,000
$100,000
3
$80,000
$100,000
4
$80,000
Assuming the firm’s required rate of return increases to 16% and that your firm only has $200,000 available to invest, which project of the two above would you chose if you used:
a.) The Profitability Index (as percentage of invested funds) as your capital rationing criterion?
b.) The Internal Rate of Return as your capital rationing criterion?
c.) The replacement chain method to evaluate mutually exclusive projects of equal size but different lifespans?
d.) Equivalent Annual Annuities to evaluate mutually exclusive projects of equal size but with different lifespans?
Year
Project A
Project B
0
-$200,000
-$200,000
1
$80,000
$100,000
2
$80,000
$100,000
3
$80,000
$100,000
4
$80,000
Explanation / Answer
Satetement shwoing Present value of cash inflow for project A and B
A)PI = Cash inflow/Cash outflow
B)
IRR is rate at which NPV is 0,
For project A
At 21.86% NPV comes to 0, hence IRR = 21.86%
For project B
IRR = 23.375%
C) Statement showing NPV
Thus project A should be choosen
D) Statement showing Equal annual revenue
Thus project B should be choosen
Year Project A PVIF @ 11% PV Project B PVIF @ 11% PV 1 80000 0.9009 72072.07207 100000 0.90090 90090.09 2 80000 0.8116 64929.79466 100000 0.81162 81162.24 3 80000 0.7312 58495.3105 100000 0.73119 73119.14 4 80000 0.6587 52698.47793 248196 244371.5Related Questions
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