Note the following information on two mutually exclusive projects under consider

Question

Note the following information on two mutually exclusive projects under consideration by Monroe Food Markets, Inc. Project A-Cash flows Year 0 $-30,000 1 $10,000 2 $10,000 3 $10,000 4 $10,000 5 $10,000 Project B-Cash flows Year 0 $-60,000 1 $20,000 2 $20,000 3 $20,000 4 $20,000 5 $20,000 Monroe requires a 14 percent rate of return on projects of this nature. 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. e. Which of the two projects, if either, should Monroe accept? Why?

Explanation / Answer

Solution:

Project A Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Initial Investment -30,000 Cash flows 10,000 10,000 10,000 10,000 10,000 Present Value of $ 1 @ 14% 0.877 0.769 0.675 0.592 0.519 Present Value of cashflows    8,771.93    7,694.68    6,749.72    5,920.80    5,193.69 Total Present value of cashflows 34,330.81 NPV = Total present value of cashflows - initial investment 4,330.81 IRR = 14 % + [ 4,330.81/(4,330.81 -(-93.88)) * ( 6%) = 19.87 % Profitability Index = Total present value of Cashflows / Initial investment 1.14 Payback period = Initial Cashflow / Annual Cashflow 3 years

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