Company K is considering two mutually exclusive projects. The cash flows outlay

Question

Company K is considering two mutually exclusive projects. The cash flows outlay and incomes of the projects are:

      Year                    Project A                                Project B

Initial Outlay                         -$2,000,000                          -$2,000,000

400,000                         

400,000                         

400,000                         

400,000         

400,000

400,000

400,000                             4,250,000

a. Compute the payback period for each project.

b. Compute the NPV for each project, assuming a 13% required rate of return.

c. Compute the Profitability Index for each project, assuming a 13% required rate of return.

d. Fully explaining your logic, assuming you ARE going to invest in one of these two projects, how would you decide between the two projects?

Explanation / Answer

a.

Thus, payback period is 5 Yeras for both Projects.

b.

c.

Thus, profitability Index is 1.79

Project A Project B Statement of payback period = Initial Cash Outlay/Cash inflow each year = Initial Cash Outlay/Cash inflow each year = 2000000/400000 = 2000000/400000 = 5 = 5

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