You are considering the following two mutually exclusive projects. Both projects

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.

Project A Project B

Year Cash Flow Year Cash Flow

0 -$45,000 0 -$40,000

1 $17,500 1 $8,200

2 $18,000 2 $14,600

3 $22,500 3 $36,800

Project A Project B

Required rate of return 8.0% 12.0%

Required payback period 2 yrs 2 yrs

Required accounting return 8.5% 9.5%

1) What is the NPV for each of the projects? Which project should be accepted if NPV method is applied? Explain why.

2) What is the IRR for each of the projects? Which project should be accepted if IRR method is applied? Explain why.

3) What is the payback period for each of the projects? Which project should be accepted if payback period method is applied? Explain why.

4) What is the discounted payback period for each of the projects? Which project should be accepted if discounted payback period method is applied? Explain why.

5) What is the profitability index for each of the projects? Which project should be accepted if profitability index method is applied? Explain why.

6) Find the crossover rate.

I'm awful with these cash flow problems, so any help with this question would be much appreciated! Please try to show the steps for how you got your answer so I can figure out how to do it myself.

Explanation / Answer

Project A

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NPV= -$45,000 + $17,500/(1+0.08)^1 + $18,000/(1+0.08)^2 + $22,500 /(1+0.08)^3 = 4 497.02789 U.S. dollars

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ProjectB

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NPV= -$40,000 + $8200/(1+0.12)^1 + $14 600/(1+0.12)^2 + $36,800 /(1+0.12)^3 =5153.9723032

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HENCE ACEPT Project B

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