Answer to Question #255897 in Finance for anshika

Question

MCARTECH Pvt. Ltd. is considering two mutually exclusive capital investments. The project’s expected net cash flows are as follows:

Expected Cash Flows

Year Project A Project B

0 -500 -875

1 100 150

2 110 200

3 120 250

4 175 375

5 240 530

6 300 680

a. If you were told that each project’s cost of capital was 12%, which project should be selected using the NPV criteria?

b. What is the profitability index for each project if the cost of capital is 12%?

c. What is the regular payback period for these two projects?

Answer 1

(a) As per the NPV criteria, project B should be selected because the NPV of project B is higher than the NPV of project A.

(b) The IRR of project A and project B is 19.12% and 27.54% respectively.

It is computed by using the following method:

(c) The regular payback period of project A and project B is 3.62 years and 2.90 years respectively.

(d)  The profitability index of project A and project B is 1.23 and 1.51 respectively.