Year A B 0 -400,000 -600,000 1 55,000 300,000 2 55,000 300,000 3 55,000 50,000 4
ID: 2740346 • Letter: Y
Question
Year A B
0 -400,000 -600,000
1 55,000 300,000
2 55,000 300,000
3 55,000 50,000
4 225,000 50,000
5 225,000 50,000
Which project would you select if you used the discounted payback method, NPV and IRR methods and explain why? The discount rate is 10%.
Explanation / Answer
PROJECT A
DISCOUNTED PAYBACK
DISCOUNTED PAYBACK
= 4 + (-109551 / 139702.50)
= 4 + 0.78
= 4.78 YEARS
NPV
IRR
IRR CAN BE CALCULATED BY USEING SPREAD SHEET FUNCTION, IRR OF PROJECT A IS 12.21%
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PROJECT B
DISCOUNTED PAYBACK
DISCOUNTED PAYBACK
= 4 + (-7635 / 31045)
= 4 + 0.25
= 4.25 YEARS
NPV
IRR
IRR CAN BE CALCULATED BY USEING SPREAD SHEET FUNCTION, IRR OF PROJECT B IS 12.28%
DECESSION
IF DISCOUNTED PAYBACK METHOD IS USED PROJECT B SHOULD BE SELECTED AS IT HAS A LOWER PAYBACK PERIOD.
IF NPV IS USED PROJECT A SHOULB BE SELECTHED AS IT HAS A HIGHER NPV COMPARED TO PROJECT B.
IF IRR IS USED PROJECT B SHOULD BE SELECTED AS IT HAS HIGHER IRR COMPARED TO PROJECT A.
YEAR CASH FLOW DISCOUNTING FACTOR @10% DISCOUNTED CASH FLOW CUMULATIVE DISCOUNTED CASH FLOW 0 -400000 1.000 -400000 -400000 1 55000 0.9091 50000.50 -349999.50 2 55000 0.8264 45452 -304547.50 3 55000 0.7513 41321.50 -263226 4 225000 0.6830 153675 -109551 5 225000 0.6209 139702.50 30151.50Related Questions
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