a. What is the payback and discounted payback of these two projects? What are th

Question

a. What is the payback and discounted payback of these two projects? What are the main flaws with these two models?

b. What is the NPV and IRR of each Project? Based on your analysis, would you accept or reject the projects (assume that they are ME projects). Please be precise.

c. What is the Fisher

a. What is the payback and discounted payback of these two projects? What are the main flaws with these two models? b. What is the NPV and IRR of each Project? Based on your analysis, would you accept or reject the projects (assume that they are ME projects). Please be precise. c. What is the Fisher??s rate? And, what is the significance of this rate? Please be precise

Explanation / Answer

Answer:

a.

The payback period does not considers the cash flow after the initial investment is recovered. The simple payback period ignores the time value of money concept

b.

Considering, the IRR and NPV of the project, I would opt electric car as it has higher NPV and IRR

c. Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, real interest rates fall as inflation increases, unless nominal rates increase at the same rate as inflation.

Electric Car year Cash flows Cumulative 0 -1000000 -1000000 1 387500 -612500 2 434375 -178125 3 492969 314844 4 639453 954297 5 749316 1703613 Normal payback = 2+(178125/492969) 2.36 years Hybrid car year Cash flows Cumulative 0 -800000 -800000 1 560000 -240000 2 378182 138182 3 287273 425455 4 196364 621819 5 196364 818183 Normal payback = 1+(240000/378182) 1.63 years

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