The Sanders Electric Company is evaluating 2 projects for possible inclusion in

Question

The Sanders Electric Company is evaluating 2 projects for possible inclusion in the firm's capital budget. Project M will require a $37,000 investment while project O"s investment will be $46,000. After-tax cash inflows are estimated follows for the 2 projects:

year project M project O

1 $12,000 $10,000

2 $12,000 $10,000

3 $12,000 $15,000

4 $12,000 $15,000

5 $15,000

a. Determine the payback period for each project.

b. Calculate the NPV & profitability index for each project based on a 10% cost of capital. Which, if either, of the projects is acceptable?

c. Determine the IRR & MIRR for projects M & O.

Explanation / Answer

Payback for M= 3.083 years

Payback for o=3.73 years

NPV for M=$1038.39

NPV for o= $2184.12

PI for M= 1.028

PI for O= 1.047

Project O must be accepted since it has a higher NPV anf PI

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