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Chrome File Edit View History Bookmarks People Window Help 80% i-Mon 8:43 PM Hassan Alsaihati QE . / D Assignment 11-GRADED-ClG consider The Following Cash Hassan × ezto.mheducation.com/hm.tpx UWM-, hotmail A ALEKS DI MathwayPEX Consider the following two mutually exclusive projects :: Apps Expedia CR E EagleRider Rentals AT&T; Pay Onlir at VIP C D wileyPLUSJeiJ Year Cash Flow (B) 36,000 19,600 14,100 14,600 11,400 Cash Flow (A) $417,000 48,000 58,000 75,000 532,000 The required return on these investments is 13 percent. a. What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Payback period Project A Project B years b. What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16) Net present value Project A Project B c. What is the IRR for each project? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Internal rate of return Project A Project B d. What is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.) Profitability index

Explanation / Answer

Where,
   A = Last period with a negative cumulative cash flow;
   B = Absolute value of cumulative cash flow at the end of the period A;
   C = Cash flow during the period after A.

Project A:

Payback period = 3 + 236000/532000 = 3.44 years

Project B:

Payback period = 2 + 2300/14600 = 2.16 years

2.

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

Project A:

NPV = -417000 + 48000/(1+0.13)^1 + 58000/(1+0.13)^2 + 75000/(1+0.13)^3 + 532000/(1+0.13)^4

NPV = $49164.71

Project B:

NPV = -36000+ 19600/(1+0.13)^1 + 14100/(1+0.13)^2 + 14600/(1+0.13)^3 + 11400/(1+0.13)^4

NPV = $9497.87

IRR: is the rate at which NPV = 0

Project A:

NPV = -417000 + 48000/(1+IRR)^1 + 58000/(1+IRR)^2 + 75000/(1+IRR)^3 + 532000/(1+IRR)^4

By trail and error, IRR = 16.76%

Project B:

NPV = -36000+ 19600/(1+IRR)^1 + 14100/(1+IRR)^2 + 14600/(1+IRR)^3 + 11400/(1+IRR)^4

By trail and error, IRR = 26.45%

d.

Profitability index = (NPV + initial investment) / initial investment

Project A:

PI = (49464.71 + 417000)/417000 = 1.12

Project B:

PI = (9497.87+36000)/36000 = 1.26

e.

Choose Project A, since the NPV is higher than Project B.

Payback Period = A + B C

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