A&B Enterprises is trying to select the best investment from among four alternat

Question

A&B Enterprises is trying to select the best investment from among four alternatives. Each alternative involves an initial outlay of $100,000. Their cash flows follow:

Evaluate and rank each alternative based on a) payback period, and b) net present value (use a 10% discount rate).

A&B; Enterprises is trying to select the best investment from among four alternatives. Each alternative involves an initial outlay of $100,000. Their cash flows follow: Evaluate and rank each alternative based on a) payback period, and b) net present value (use a 10% discount rate).

Explanation / Answer

Payback period Project A = 4 years Project B= 2+10000/30000= 2.33 years Project C = 4 years Project D = 4 years Rank by payback period B is the best. And A=C=D NPV Project A=-100000+10000/1.1+20000/1.1^2+30000/1.1^3+40000/1.1^4+50000/1.1^5 NPV,A=6525.88 Likewise NPV,B= 1051.84 NPV,C=-5230.33 NPV,D=8630.19 Rank by NPV D>A>B>C

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