Jenette is considering two mutually exclusive projects. The cash flows outlay an
ID: 2640605 • Letter: J
Question
Jenette is considering two mutually exclusive projects. The cash flows outlay and incomes of the projects are:
Year
Project A
Project B
1
-2,000,000
-2,000,000
2
400,000
3
400,000
4
400,000
5
400,000
6
400,000
7
400,000
4,250,000
Compute the payback period for each project
Compute the NPV for each project, assuming a 13% required rate of return
Compute the profitability index for each project, assuming a 13% required rate of return
Fully explaining your logic, how would you decide between these two projects
Year
Project A
Project B
1
-2,000,000
-2,000,000
2
400,000
3
400,000
4
400,000
5
400,000
6
400,000
7
400,000
4,250,000
Explanation / Answer
Project b is selected because of less payback period less NPV and more PI.
Project A Project B Year Project A Project B 13% discounted cash flow project A discounted cash flow project B 1 -2000000 -2000000 0.885 2 400000 0 0.7831 313240 0 3 400000 0 0.6931 277240 0 4 400000 0 0.6133 245320 0 5 400000 0 0.5428 217120 0 6 400000 0 0.4803 192120 0 7 400000 4250000 0.4251 170040 1806675 1415080 1806675 Pay Back period 5.83 Years 3.294 Years NPV pv of cash flow- initial investment -584920 -193325 PI pv of cash flow/initial investment 0.70754 0.903338Related Questions
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