The following information is presented for two mutually exclusive projects under

Question

The following information is presented for two mutually exclusive projects under consideration by Wang Food Markets, Inc. Wang requires a 12 percent rate of return on project of this nature

Year A B
0 $-30,000 $-60,000
1 6,000 20,000
2 9,000 20,000
3 10,000 20,000
4 12,000 20,000
5 14,000 20,000

a. Compute the NPV of both projects.
b. Compute the internal rate of return on both projects.
c. Compute the profitability index of both projects.
d. Compute the payback period on both projects.

Can you explain how to get each.

Explanation / Answer

k = 1.12^-1 Project A NPV = -30000 + 6000*k + 9000 * k^2 + 10000* k^3 + 12000* k^4 + 14000* k^5 = $5,219.9 IRR = value of (k-1) at which NPV becomes 0 =17.9276% PI =1+ NPV/Inital Investment = 1.174 Payback period = Time at which sum of cash inflows = total initial outflows= 3 + (30000-6000-9000-10000)/12000 = 3.417 years Similarly Project B NPV = $12,095.5 IRR = 19.8577% PI = 1+ 12095.5/60000 = 1.2016 Pay back period = 3 years

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