Show work and explain please for lifesaver... Calculate the payback and profitab
ID: 2647394 • Letter: S
Question
Show work and explain please for lifesaver...
Calculate the payback and profitability index. The maximum payback period is 2 years and the cost of capital is 12%.
Project
Time 0
1
2
3
Fun Time
-1000
950
400
-225
Clock Works
-500
550
0
0
Bug Hugs
-1100
500
500
500
A: If the projects are independent, which one(s) do you select? Why?
B: If they are mutually exclusive, which one would you prefer? Why?
Project
Time 0
1
2
3
Fun Time
-1000
950
400
-225
Clock Works
-500
550
0
0
Bug Hugs
-1100
500
500
500
Explanation / Answer
1) Payback period for fun time = 1 + 50 / 450 = 1.11 years
Payback period for clock works = 500 / 550 = 0.91 year
Payback period for Bug hugs = 2 + 100 / 500 = 2.2 years
2) PI for fun time = (950/1.12 + 400/1.12^2 - 225/1.12^3) / 1000 = 1.01
PI for clock works = 550/1.12 / 500 = 0.98
PI for Bug hugs = (500/1.12 + 500/1.12^2 + 500/1.12^3) / 1100 = 1.09
A) Project fun time will be selected as it has PI > 1 and also meet the criteria of payback period. However project Bug hugs will also be beneficial to accept as it also has PI > 1.
B) Project fun time will be selected as it has PI > 1 and also meet the company's criteria of payback period.
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