The Bolster Company is considering two mutually exclusive projects: Year Initial
ID: 2626856 • Letter: T
Question
The Bolster Company is considering two mutually exclusive projects:
Year
Initial Outlay
NPV
0
-$100,000
-$100,000
1
31,250
0
2
31,250
0
3
31,250
0
4
31,250
0
5
31,250
200,000
The required rate of return on these projects is 12 percent.
a. What is each project's payback period?
b. What is each project's net present value?
c. What is each project's internal rate of return?
d. Fully explain the results of your analysis. Which project do you prefer, and why?
e. WHAT IS THE PROJECT
Year
Initial Outlay
NPV
0
-$100,000
-$100,000
1
31,250
0
2
31,250
0
3
31,250
0
4
31,250
0
5
31,250
200,000
Explanation / Answer
a.Project A Payback Period= 100000/31250 = 3.2 years
Project B Payback Period= 5 years
b. Net present value of A = -100000+31250/1.12^1+31250/(1.12)^2+31250/(1.12)^3+31250/(1.12)^4+31250/(1.12)^5
= 12649.26
NPV= -100000+0+0+0+0+200000/(1.12)^5= 13485.37
c. Project a= 16.99
Project B= 14.87
d. Project A should be selected because the IRR is more then project b and Payback period of project a is less then project b.
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