Pound Industries is attempting to select the best of three mutually exclusive pr

Question

Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and after-tax cash inflows associated with these projects are shown in the following table. Calculate the payback period for each project. Calculate the net present value (NPV) of each project, assuming that the firm has a cost of capital equal to 13%. Calculate the internal rate of return (IRR) for each project. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.

Explanation / Answer

Solution.

A. Calculation for pay back period.

Project A = 2+(20,000 / 20,000 ) = 3 year

Project B = 3 + ( 5,500 / 31,500 ) = 3.17 year

Project C = 3 + ( 12,500 / 32,500 ) = 3.38 year.

B. Calculation for net present value.

C. Calculation For IRR.

(For IRR used Excel Formula)

Casf inflow Accumulated Inflow Year Project A Project B Project C Project A Project B Project C 0      60,000    100,000    110,000 1      20,000      31,500      32,500      20,000      31,500      32,500 2      20,000      31,500      32,500      40,000      63,000      65,000 3      20,000      31,500      32,500      60,000      94,500      97,500 4      20,000      31,500      32,500      80,000 126,000 130,000 5      20,000      31,500      32,500    100,000 157,500 162,500

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