Your task is to analyze two mutually exclusive projects: Year Cash Flow Project

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

A] Using the payback criterion, explain which investment should you chose?

Payback of Project X = 3 + 255000/540000

Payback of Project X = 3.47 Years

Payback of Project Y = 2+ 15000/20000

Payback of Project Y = 2.75 Years

Decision : Investment in Project Y Should be choosen

Working

B] Using the discounted payback criterion, explain which investment should you chose?

Discounted Payback of Project X = 3 + 293441/308747

Discounted Payback of Project X = 3.95 Years

Discounted Payback of Project Y = 3 + 8116/11435

Discounted Payback of Project Y = 3.71 Years

Decision : Investment in Project Y Should be choosen

Working

C] Using the NPV criterion, explain which investment should you chose?

NPV of Project X = 15305.48

NPV of Project Y = 3318.85

Decision : Investment in Project X Should be choosen

Working

D] Using the IRR criterion, explain which investment should you chose?

IRR of Project X = 16.23%

IRR of Project Y = 18.21%

Decision : Investment in Project X Should be choosen

Working

E] Using the profitability index criterion, explain which investment should you chose?

profitability index of Project X =(1+ NPV/Initial Investment)

profitability index of Project X = (1+15305.48/400000)

profitability index of Project X = 1.04

profitability index of Project Y =(1+ NPV/Initial Investment)

profitability index of Project Y = (1+3318.85/50000)

profitability index of Project Y = 1.07

Decision : Investment in Project Y Should be choosen

F] Based on your analysis in (A) thru (E), explain which investment should you finally chose?

Decision : Investment in Project Y Should be choosen as its IRR is higher than Project X

Year     Cash Flow Project X Cumulative Cash Flow Project Z Cumulative       -0- -400,000 -400,000 -50000 -50,000         1 25,000 -375,000 20000 -30,000         2 60,000 -315,000 15000 -15,000         3 60,000 -255,000 20000 5,000         4 540,000 285,000 20000 25,000

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