Project S has a cost of $10,000 and is expected to produce cash flows of $3,000
ID: 2683642 • Letter: P
Question
Project S has a cost of $10,000 and is expected to produce cash flows of $3,000 per year for five years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for five years. The company uses straight-line depreciation. Assume a 12% cost of capital.a. Calculate the following:
Project S Project L
NPV _______________ _______________
IRR _______________ _______________
MIRR _______________ _______________
PI _______________ _______________
b. Assuming these projects are mutually exclusive, which one should be selected
c. Justify your selection.
Explanation / Answer
-------Project S---Project L NPV-----$814.33 ---$1,675.34 IRR------15.24%------14.67% MIRR---13.77%------13.46% PI--------1.08 ------1.07 PBP----3 yrs and 5 mo.---3 yrs and 5 mo. DPBP--4 yrs and 7 mo.-- 4 yrs and 8 mo. Even though the Projec L has a higher NPV doesn't mean we should accept L The IRR and MIRR for Project S is higher than that of Project L thus making Project S more attractive The Profitability Index for Project S is higher than that of Project L thus making project S more attractve The discounted payback period for Project S is smaller than that of Project L thus making Project S more attractive
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