Karen is considering two capital expenditure projects; however, she only has eno

Question

Karen is considering two capital expenditure projects; however, she only has enough money to do one of the two project. The cash flows are shown below and the discount rate (or market rate) is 12%. Assume that both project will hold their value and be worth the same as their purchase price at the end of the three years. Project A Project B Initial cost $(25,000) $(50,000) Year 1 15,000 27,500 Year 2 15,000 27,500 Year 3 15,000 27,500 Required Calculate the internal rate of return, payback period, Return on Investment and net present value for each project.Show all your work and label all your numbers. If you used a website calculator, include the website as a reference and cite it in your memo. An example of one website is - http://www.datadynamica.com/irr.asp Based on your calculations, prepare a minimum of 1 page memo to Karen explaining which project she should choose and why. Keep in mind, Karen is a client, and does not have an accounting or finance background. Make sure you write your memo in a way that she would understand what you are talking about. Your memo should be the quality that you would produce in the work place for a client. Your report should explain/ include: What internal rate of return, payback period & net present value will tell you – i.e. what do they mean. Show the results of your calculation in #1 within the memo. It is suggested to present it in table form, instead of verbally explaining your calculations. (In word this in the - insert menu/ tables) An example: Detailed calculations included in an attachment or cite website. Which project you recommend and why. Your calculation should support your answer. Show your detailed calculations for internal rate of return, payback period, return on investment & net present value. This should be an attachment to your memo. Show all your work and label all your numbers. If you used a website calculator, include the website as a reference and cite it. Include any references & citation in APA format.

Explanation / Answer

year Project A present value @12% present value of cash flow year Project A present value @12% present value of cash flow cash outflow 0 -25000 -25000 cash outflow 0 -50000 -50000 1 15000 0.892857143 13392.8571 1 27500 0.892857 24553.57 2 15000 0.797193878 11957.9082 2 27500 0.797194 21922.83 3 15000 0.711780248 10676.7037 3 27500 0.71178 19573.96 sum of present value of cash inflow 36027.469 sum of present value of cash inflow 66050.36 cash outflow -25000 cash outflow -50000 NPV 11027.469 NPV 16050.36 IRR 22% IRR 16% Pay back period 1.66666667 Years Pay back period 1.818182 Years return on investment 60 percent return on investment 55 percent Project A Project B decision NPV 11027.469 16050.36 Project B IRR 22% 16% project A PBP 1.6666667 1.8181818 Project A Rate of investment 60 55 Project A on the basis of this discussion Net present value refers to present worth of net cash inflows means whatever amount we will get what is the present value of it so according to npv method project b should be accepted because npv of project b is high. Irr is called internal rate of return which means minimum required return to make or recover all investments so high irr rate is always preferable and project A is having highest irr so it should be selected. pay back period denotes the time period in which entire amount of investment is recovered so project A time period of recovering money is 1.66 years so it should be accepted. rate of return on investment is also higher in case of project A so it should be accepted.

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