You are considering the following two mutually exclusive projects. Both projects
ID: 2656168 • Letter: Y
Question
You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.
The required rate of return is 10%.
Year
Project(A)
Project (B)
0
-$35,000
-$5,500
1
13,000
1,000
2
11,000
1,000
3
9,000
1,000
4
7,000
1,000
5
5,000
1,000
6
7
3,000
1,000
1,000
1,000
a. (5 points) What is the NPV for each of the projects? Which project should be accepted if NPV method is applied? Explain why.
b. (5 points) What is the IRR for each of the projects? Which project should be accepted if IRR method is applied? Explain why.
c. (5 points) What is the payback period for each of the projects? Which project should be accepted if payback period method is applied? Assume that the target payback period is 4 years. Explain why.
d. (5 points) What is the discounted payback period for each of the projects? Which project should be accepted if discounted payback period method is applied? Assume that the target discounted payback period is 4 years. Explain why. Explain why.
e. (5 points) What is the profitability index for each of the projects? Which project should be accepted if profitability index method is applied? Explain why.
f. (5 points) What is the average accounting return (AAR) for each of the projects, assuming that cash flows occurring after year 0 are net income? Which project should be accepted if AAR method is applied? Also, assume that the target AAR is 40%.
g. (5 points) Define and find the crossover rate.
h. (5 points) Sketch the NPV profile. Plot all the relevant coordinates (i.e., the points on the x and y axis; and the cross-over rate) on the graph.
Year
Project(A)
Project (B)
0
-$35,000
-$5,500
1
13,000
1,000
2
11,000
1,000
3
9,000
1,000
4
7,000
1,000
5
5,000
1,000
6
7
3,000
1,000
1,000
1,000
Explanation / Answer
1.
NPV of Project A is higher and positive. Hence Project A must be selected.
2.
Project A must be selcetd beacuse IRR of project A is higher than Project B. Moreover Project A IRR
is greater than required rate of return.
3.
Project A must be selected because Project A's Payback Period is less than 4 but Project B's payback period is more than 4 and hence rejected
4.
Both the projects are rejected because both projects's Discounted Payback period is more.than 4 years
As Per CHEGG policy 4 subparts can be solved at atime. Please place the remaining questions to get the answerrs.
Best of Luck. God Bless
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