The State Spartan Corporation is considering tow mutually exclusice projects. Th

Question

The State Spartan Corporation is considering tow mutually exclusice projects.  The required rate of return on these projects is 10%.  

The Cash flow info:

                          PROJECT A                                   PROJECT B

Initial outlay   -50,000                                             -50,000

Inflow year 1   15,625                                               0

" "year 2           15,625                                               0

Year 3              15,625                                               0

" Year 4            15,625                                               0

" Year 5            15,625                                               100,000

A. What is the payback method for projects A and B?

B. What is the NPV of Projects A and B?

C. What is the IRR of Projects A and B?

D. What caused the ranking conflict?

Explanation / Answer

PAYBACK PERIOD FOR PROJECT-A

=INITIAL INVESTMENT/ANNUAL CASHFLOW EACH YEAR

=50000/15625

=3.2 YEARS

PAYBACK PERIOD FOR PROJECT-B

=4 + 50000/100000

= 4+0.5

=4.5 YEARS

NPV FOR PROJECT-A

=15625*PVIFA(10%,5)

PAYBACK PERIOD FOR PROJECT-A

=INITIAL INVESTMENT/ANNUAL CASHFLOW EACH YEAR

=50000/15625

=3.2 YEARS

PAYBACK PERIOD FOR PROJECT-B

=4 + 50000/100000

= 4+0.5

=4.5 YEARS

NPV FOR PROJECT-A

=15625*PVIFA(10%,5)

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