You have a choice between two mutually exclusive investments. Project A requires initial cash outlay of $150,000 and has projected cash flows of $100,000 for year one, $55,000 for year two, and $30,000 for year three. Meanwhile, Project B requires initial cash outlay of $100,000 and has projected cash flows of $40,000 per year for the next three years. The required rate of return is 10%.
(a)(3 points) Calculate the ordinary payback period for both projects and determine which should be accepted. Assume the target payback period is 2 years. Explain why.
(b) (4 points) Calculate the discounted payback period for both projects and determine which should be accepted. Assume the target payback period is 2 years Explain why.
(c) (3 points) Calculate the profitability index (PI) for both projects and determine which should be accepted. Explain why.
(d) (4 points) Assuming the projected cash flow is a future net income, calculate the average accounting return (AAR) for both projects and determine which should be accepted if the target average accounting return is 30%. Explain why.
You have a choice between two mutually exclusive investments. Project A requires initial cash outlay of $150,000 and has projected cash flows of $100,000 for year one, $55,000 for year two, and $30,000 for year three. Meanwhile, Project B requires initial cash outlay of $100,000 and has projected cash flows of $40,000 per year for the next three years. The required rate of return is 10%.
(a)(3 points) Calculate the ordinary payback period for both projects and determine which should be accepted. Assume the target payback period is 2 years. Explain why.
(b) (4 points) Calculate the discounted payback period for both projects and determine which should be accepted. Assume the target payback period is 2 years Explain why.
(c) (3 points) Calculate the profitability index (PI) for both projects and determine which should be accepted. Explain why.
(d) (4 points) Assuming the projected cash flow is a future net income, calculate the average accounting return (AAR) for both projects and determine which should be accepted if the target average accounting return is 30%. Explain why.
Related questions
You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value
| Year | Project(A) | Project (B) |
| 0 | -$30,000 | -$25,000 |
| 1 | 10,000 | 8,000 |
| 2 | 11,000 | 8,000 |
| 3 | 12,000 | 8,000 |
| 4 | 13,000 | 8,000 |
The required rate of return is 10%.
(a) What is the NPV for each of the projects? Which project should be accepted if NPV method is applied? Explain why.
(b) What is the IRR for each of the projects? Which project should be accepted if IRR method is applied? Explain why.
(c) What is the payback period for each of the projects? Which project should be accepted if payback period method is applied? Explain why.
(d) What is the discounted payback period for each of the projects? Which project should be accepted if discounted payback period method is applied? Explain why.
(e) What is the profitability index for each of the projects? Which project should be accepted if profitability index method is applied? Explain why.
(f) Find the crossover rate. Show the equation.
(g) Sketch the NPV profile. You must plot at least 5 points for the profile: two points on the x and y axis each, and the cross-over rate on the x axis.
| Yr | Sates of Affairs Cash Flow | Mcarthys Cash Flow | Gotham Cash Flow | |
| 0 | -$7,500,000 | -$5,000,000 | -$4,000,000 | |
| 1 | $5,000,000 | $1,000,000 | $5,750,000 | |
| 2 | $4,500,000 | $2,000,000 | $5,750,000 | |
| 3 | $3,000,000 | $3,000,000 | -$1,000,000 | |
| 4 | -$1,000,000 | $4,000,000 | $0.00 | |
| 5 | $2,500,000 | $4,000,000 | ||
| 6 | $2,500,000 | |||
Required rate of return: 8.00%
Calculate the payback period for each project. If our required payback period is 3 years which projects will we accept?
Calculate the Net Present Value of each project. Which projects should we accept?
Calculate the Internal rate of return for each project. Which projects should be accepted?
Calculate the Modified Internal Rate of Return for each project. Which projects should be accepted?
Calculated the Profitability Index for each project. Which projects should be accepted?
If the company only has$10,000,000 for projects which project(s) should be accepted using the equivalent Annual Annuity? Report the EEA for each project?
