Question #147854

ABC Pvt. Ltd. is considering two mutually exclusive capital investments. The projectâ€™s expected net cash flows are as follows:

Expected Cash Flows

Year Project A Project B

0 -375 -575

1 -300 190

2 -200 190

3 -100 190

4 600 190

5 600 190

6 926 190

7 -200 0

If you were told that each projectâ€™s cost of capital was 12%, which project should be selected using the NPV criteria? What is each projectâ€™s IRR? What is the regular payback period for these two projects? What is the profitability index for each project if the cost of capital is 12%?

Expected Cash Flows

Year Project A Project B

0 -375 -575

1 -300 190

2 -200 190

3 -100 190

4 600 190

5 600 190

6 926 190

7 -200 0

If you were told that each projectâ€™s cost of capital was 12%, which project should be selected using the NPV criteria? What is each projectâ€™s IRR? What is the regular payback period for these two projects? What is the profitability index for each project if the cost of capital is 12%?

Expert's answer

Net present value of project (B)

NPV = -initial cost + ACF(PVIF12%,6)

NPV = -575 + 190(PVIF12%,6)

NPV "= - 575 +190 \\times 4.1114"

NPV = $206.17

Based on NPV Creterian Project (A) should be selected, because of its higher NPV

Calculation of IRR of both the projects, using Excel function of IRR would be:

Project A = 18.64%

Project B = 23.92 %

Regular payback periods:

Project A = 4 years + "\\frac{375}{600}" = 4.625 years

Project B = "\\frac{575}{190}" = 3.03 years

Profitability index (PI):

PI = PV cash inflow/initial costs

PI (A) = "\\frac{601.90}{375} = 1.6051"

PI (B) = "\\frac{781.17}{575} = 1.3586"

Learn more about our help with Assignments: Finance

## Comments

## Leave a comment