You have been provided the follow information for a mutually exclusive capital b

Question

You have been provided the follow information for a mutually exclusive capital budgeting problem: The Company has a required rate of return of 12 percent. Clearly label your work and show your calculations! Calculate the payback period for both projects. Calculate the discounted payback period for each of the projects. Calculate the net present value for each of the projects. Calculate the profitability index for each of the projects. Calculate the IRR for each of the projects (You may use a Spreadsheet!). Complete the following table: Bonus Question: Was the same project accepted for all the evaluation techniques? If yes, which project should be accepted? If no, why and when do the different evaluation methods select different projects and which project should be accepted?

Explanation / Answer

Answer:

(a) Calculation of Payback Period of Project A and Project B

Payback Period is the length of time within which initial investment of project are recovered back to firm.

Payback Period for Project A

Initial Investment / Outflow = $430,000

it is clear from the cumulative figures calculated above that payback period is between Year 2 and year 3

So, Payback Period = 2 Years + ($430,000 - $409,000 )/$124,000 = 2 Years + 0.169 Year = 2.169 Years

Upto 2 years Project A recovered total amount $409,000...now we need remainging amount to recover $29,000 and we need to find out time within which $29,000 is earned.. If $124,000 is earned in whole Year 3 than we need to find out in how much time $29,000 can be recovered.....it is $29,000 / $124,000 = 0.169 Year...

Payback Period for Project B (by applying above) = 2 Years + ($430,000 - $208,000)/$240,000 = 2 Years + 0.925 Year = 2.925 Years

(B) Calculation of Discounted Payback Period

Discounted Payback period is same as Payback Period except time value of money. Discounted Payback period is cosidered time value of money.

Discounted Payback Period

Project A = 2 Years + ($430,000 - $348,053) / $88,288 = 2 Years + 0.928 Year = 2.928 Years

Project B = 3 Years + ($430,000 - $343,376)/$165,360 = 3 Years + 0.524 Years = 3.524 Years

(C) Calcuation of NPV of Project A and Project B

(D) Profitability Index = PV of Cash Inflow / PV of Cash Outflow

From above calculation

Project A

PV of Cash Inflow = $496,125

PV of Cash Outlfow = $430,000

Profitability Index = $496,125 / $430,000 = 1.154

Project B

PV of Cash Inflow = $508,736

PV of Cash Outlfow = $430,000

Profitability Index = $508,736 / $430,000 = 1.183

Friend...please ask other part in seperate question....i will answer all the questions.....it is very lengthly and time consuming..

Year Cash Flow (Project A) Cumulative Cash Flow (Project A) Cash Flow (Project B) Cumulative Cash Flow (Project B) 1 $230,000 $230,000 $70,000 $70,000 2 $179,000 $409,000 $138,000 $208,000 3 $124,000 $533,000 $240,000 $448,000 4 $94,000 $627,000 $260,000 $708,000 $627,000 $708,000

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