A and B are mutually exclusive projects. The required rate of return is 10%. The
ID: 2712685 • Letter: A
Question
A and B are mutually exclusive projects. The required rate of return is 10%.
The cutoff period is 2 years.
Year
Project A
Project B
0
-$1,000
-$1,000
1
500
100
2
400
300
3
300
400
4
100
675
If the company applies payback period decision, which project should be recommended?
a Project A because it has payback of 2.33 years.
b. Project A because it has payback of 2.107 years.
c. Project B because it has payback of 2.33 years.
d. Project B because it has payback of 3.30 years.
e. Neither of two projects is recommended.
Year
Project A
Project B
0
-$1,000
-$1,000
1
500
100
2
400
300
3
300
400
4
100
675
Explanation / Answer
the Present value of the return
In 2 years pay back the PV of the project A is $ [1000 - 454.54 - 330.57] = - 214.89 negative PV
simiarly in Project B the PV is $ [ 1000- 90.90 - 272.72] = - 636.38 negative PV.
a.In 2.33 years =
Projct A - the PV = $[1000 - 785.98 - 225.39 /3]= 1000- 861.11= 138.89 negative PV.
b. Project A = the PV = $ [1000 - 785.98- 225.39 x0.107] = 1000 - 809.50 = 190.50 negative PV.
c. Project B in 2.33 years = PV = $ [1000 - 90.90 - 272,72 - 300.52 /3] = 1000 - 363.72 = 636.38 negative PV.
d. Project B in 3.30 years = PV = S [ 1000 - 90.90 - 272.72- 300.52 - 461.03 x0.30 ] = 1000 - 802.44 = 197.56 negative.
E all projects are negative PV on the above premises , therefore niether of two project is recommended.
particulars / Year troject A project B Year 1 [return / 1.10] 454.54 90.90 year 2 [return / 1.21] 330.57 272.72 year 3 . [return / 1.331] 225.39 300.52 year 4 [Return / 1.4641] 68.30 461.03Related Questions
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