A. Consider the following cash flows for the two investments. What are the payba
ID: 2813685 • Letter: A
Question
A. Consider the following cash flows for the two investments. What are the payback periods on the two investments?
Answer options:
Project A 1.58 years; Project B 2.06 year
Project A 1.58 years; Project B 2.06 years
Project A 1.46 years; Project B 1.89 years
Consider the following cash flows for the two investments. If the interest rate is 10%, what is the profitability index (PI) of each investment?
Answer options:
Project A 1.784; Project B 2.113
Project A 1.837; Project B 2.482
Project A 1.46 years; Project B 2.21 years
Year Investment A Investment B 0 -$100 -$100 1 58 31 2 73 58 3 87 180Explanation / Answer
a.
A:
Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).
=1+(42/73)
=1.58 years(Approx)
B:
Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).
=2+(11/180)
=2.06 years(Approx)
Hence the correct option is Project A 1.58 years; Project B 2.06 year
2.
A:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=58/1.1+73/1.1^2+87/1.1^3
=$178.4222389
PI=Present value of inflows/Present value of outflows
=$178.4222389/100
=1.784(Approx)
B:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=31/1.1+58/1.1^2+180/1.1^3
=$211.3523666
PI=Present value of inflows/Present value of outflows
=$211.3523666/100
=2.113(Approx).
Hence the correct option is Project A 1.784; Project B 2.113
Year Cash flows Cumulative Cash flows 0 (100) (100) 1 58 (42) 2 73 31 3 87 118Related Questions
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