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# Answer to Question #147854 in Finance for Ka

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%?
1
2020-12-10T10:06:19-0500

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"

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