Your task is to analyze two mutually exclusive projects: Year Cash Flow Project
ID: 2651283 • Letter: Y
Question
Your task is to analyze two mutually exclusive projects:
Year Cash Flow Project X Cash Flow Project Z
-0- -400,000 -50,000
1 25,000 20,000
2 60,000 15,000
3 60,000 20,000
4 540,000 20,000
Whichever project you chose, if any, you require a 15% return on your investment.
A] Using the payback criterion, which investment should you chose? Why?
B] Using the discounted payback criterion, which investment should you chose? Why?
C] Using the NPV criterion, which investment should you chose? Why?
D] Using the IRR criterion, which investment should you chose? Why?
E] Using the profitability index criterion, which investment should you chose? Why?
F] Based on your analysis in (A) thru (E), which investment should you finally chose? Why?
Explanation / Answer
Answer:
Ans-1
Calculation of Payback Period and Evalulation of Projects
Project X
Project Y
Year
Cash Flows (CF)
Cummulative CF
Cash Flows (CF)
Cummulative CF
0
$ (400,000.00)
$ (400,000.00)
$ (50,000.00)
$ (50,000.00)
1
$ 25,000.00
$ (375,000.00)
$ 20,000.00
$ (30,000.00)
2
$ 60,000.00
$ (315,000.00)
$ 15,000.00
$ (15,000.00)
3
$ 60,000.00
$ (255,000.00)
$ 20,000.00
$ 5,000.00
4
$ 540,000.00
$ 285,000.00
$ 20,000.00
$ 25,000.00
Payback Period = 3 Years + 1 year *255000 /540000
Payback Period = 2 Years + 1 year *15000 /20000
= 3.47 Years
= 2.75 Years
Project Y has shorter Payback preiod hence Project Y is better
Ans-2
Calculation of Discounted Payback Period and Evalulation of Projects
Project X
Project Y
Year
PVF (15%)
Cash Flows (CF)
PV =CF * PVF
Cummulative PV
Cash Flows (CF)
PV =CF * PVF
Cummulative PV
0
1.00000
$ (400,000.00)
$ (400,000.00)
$ (400,000.00)
$ (50,000.00)
$ (50,000.00)
$ (50,000.00)
1
0.86957
$ 25,000.00
$ 21,739.13
$ (378,260.87)
$ 20,000.00
$ 17,391.30
$ (32,608.70)
2
0.75614
$ 60,000.00
$ 45,368.62
$ (332,892.25)
$ 15,000.00
$ 11,342.16
$ (21,266.54)
3
0.65752
$ 60,000.00
$ 39,450.97
$ (293,441.28)
$ 20,000.00
$ 13,150.32
$ (8,116.22)
4
0.57175
$ 540,000.00
$ 308,746.75
$ 15,305.48
$ 20,000.00
$ 11,435.06
$ 3,318.85
Payback Period = 3 Years + 1 year *293441.28 /308746.75
Payback Period = 3 Years + 1 year *8116.22 /11435.06
= 3.95 Years
= 3.71 Years
Project Y has shorter Payback preiod hence Project Y is better
Ans-3
Calculation of NPV and Evalulation of Projects
Project X
Project Y
Year
PVF (15%)
Cash Flows (CF)
PV =CF * PVF
Cash Flows (CF)
PV =CF * PVF
0
1.00000
$ (400,000.00)
$ (400,000.00)
$ (50,000.00)
$ (50,000.00)
1
0.86957
$ 25,000.00
$ 21,739.13
$ 20,000.00
$ 17,391.30
2
0.75614
$ 60,000.00
$ 45,368.62
$ 15,000.00
$ 11,342.16
3
0.65752
$ 60,000.00
$ 39,450.97
$ 20,000.00
$ 13,150.32
4
0.57175
$ 540,000.00
$ 308,746.75
$ 20,000.00
$ 11,435.06
NPV (Sum of PVs)
$ 15,305.48
$ 3,318.85
Project X has higher NPV hence project X is better
Ans-4
Calculation of PI and Evalulation of Projects
Project X
Project Y
Year
PVF (15%)
Cash Flows (CF)
PV =CF * PVF
Cash Flows (CF)
PV =CF * PVF
Cash Outflows (A)
0
1.00000
$ (400,000.00)
$ (400,000.00)
$ (50,000.00)
$ (50,000.00)
Cash Inflows
1
0.86957
$ 25,000.00
$ 21,739.13
$ 20,000.00
$ 17,391.30
2
0.75614
$ 60,000.00
$ 45,368.62
$ 15,000.00
$ 11,342.16
3
0.65752
$ 60,000.00
$ 39,450.97
$ 20,000.00
$ 13,150.32
4
0.57175
$ 540,000.00
$ 308,746.75
$ 20,000.00
$ 11,435.06
PV of Cash Inflows (B)
$ 415,305.48
$ 53,318.85
PI = B/A
1.04
1.07
Project Y has higher PI hence project Y is better
Ans-1
Calculation of Payback Period and Evalulation of Projects
Project X
Project Y
Year
Cash Flows (CF)
Cummulative CF
Cash Flows (CF)
Cummulative CF
0
$ (400,000.00)
$ (400,000.00)
$ (50,000.00)
$ (50,000.00)
1
$ 25,000.00
$ (375,000.00)
$ 20,000.00
$ (30,000.00)
2
$ 60,000.00
$ (315,000.00)
$ 15,000.00
$ (15,000.00)
3
$ 60,000.00
$ (255,000.00)
$ 20,000.00
$ 5,000.00
4
$ 540,000.00
$ 285,000.00
$ 20,000.00
$ 25,000.00
Payback Period = 3 Years + 1 year *255000 /540000
Payback Period = 2 Years + 1 year *15000 /20000
= 3.47 Years
= 2.75 Years
Project Y has shorter Payback preiod hence Project Y is better
Ans-2
Calculation of Discounted Payback Period and Evalulation of Projects
Project X
Project Y
Year
PVF (15%)
Cash Flows (CF)
PV =CF * PVF
Cummulative PV
Cash Flows (CF)
PV =CF * PVF
Cummulative PV
0
1.00000
$ (400,000.00)
$ (400,000.00)
$ (400,000.00)
$ (50,000.00)
$ (50,000.00)
$ (50,000.00)
1
0.86957
$ 25,000.00
$ 21,739.13
$ (378,260.87)
$ 20,000.00
$ 17,391.30
$ (32,608.70)
2
0.75614
$ 60,000.00
$ 45,368.62
$ (332,892.25)
$ 15,000.00
$ 11,342.16
$ (21,266.54)
3
0.65752
$ 60,000.00
$ 39,450.97
$ (293,441.28)
$ 20,000.00
$ 13,150.32
$ (8,116.22)
4
0.57175
$ 540,000.00
$ 308,746.75
$ 15,305.48
$ 20,000.00
$ 11,435.06
$ 3,318.85
Payback Period = 3 Years + 1 year *293441.28 /308746.75
Payback Period = 3 Years + 1 year *8116.22 /11435.06
= 3.95 Years
= 3.71 Years
Project Y has shorter Payback preiod hence Project Y is better
Ans-3
Calculation of NPV and Evalulation of Projects
Project X
Project Y
Year
PVF (15%)
Cash Flows (CF)
PV =CF * PVF
Cash Flows (CF)
PV =CF * PVF
0
1.00000
$ (400,000.00)
$ (400,000.00)
$ (50,000.00)
$ (50,000.00)
1
0.86957
$ 25,000.00
$ 21,739.13
$ 20,000.00
$ 17,391.30
2
0.75614
$ 60,000.00
$ 45,368.62
$ 15,000.00
$ 11,342.16
3
0.65752
$ 60,000.00
$ 39,450.97
$ 20,000.00
$ 13,150.32
4
0.57175
$ 540,000.00
$ 308,746.75
$ 20,000.00
$ 11,435.06
NPV (Sum of PVs)
$ 15,305.48
$ 3,318.85
Project X has higher NPV hence project X is better
Ans-4
Calculation of PI and Evalulation of Projects
Project X
Project Y
Year
PVF (15%)
Cash Flows (CF)
PV =CF * PVF
Cash Flows (CF)
PV =CF * PVF
Cash Outflows (A)
0
1.00000
$ (400,000.00)
$ (400,000.00)
$ (50,000.00)
$ (50,000.00)
Cash Inflows
1
0.86957
$ 25,000.00
$ 21,739.13
$ 20,000.00
$ 17,391.30
2
0.75614
$ 60,000.00
$ 45,368.62
$ 15,000.00
$ 11,342.16
3
0.65752
$ 60,000.00
$ 39,450.97
$ 20,000.00
$ 13,150.32
4
0.57175
$ 540,000.00
$ 308,746.75
$ 20,000.00
$ 11,435.06
PV of Cash Inflows (B)
$ 415,305.48
$ 53,318.85
PI = B/A
1.04
1.07
Project Y has higher PI hence project Y is better
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