1-What is the payback period for each project? Project A Project B years years 2.What is the NPV for each project? Project A Project B 3. What is the IRR for each project? Project A Project B % %
1-What is the payback period for each project? Project A Project B years years 2.What is the NPV for each project? Project A Project B 3. What is the IRR for each project? Project A Project B % %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:### Investment Decision Analysis: Evaluating Two Mutually Exclusive Projects
Consider the following two mutually exclusive projects:
| Year | Cash Flow (A) | Cash Flow (B) |
|------|---------------|---------------|
| 0 | -$433,000 | -$44,000 |
| 1 | $40,000 | $21,200 |
| 2 | $66,000 | $12,500 |
| 3 | $83,000 | $22,600 |
| 4 | $548,000 | $19,400 |
The required return for these investments is 15 percent.
### Questions to Guide Decision-Making
1. **What is the payback period for each project?**
- **Project A**: ___ years
- **Project B**: ___ years
2. **What is the NPV (Net Present Value) for each project?**
- **Project A**: $___
- **Project B**: $___
3. **What is the IRR (Internal Rate of Return) for each project?**
- **Project A**: ___%
- **Project B**: ___%
4. **What is the profitability index for each project?**
- **Project A**: ___
- **Project B**: ___
5. **Based on your answers from questions 1 through 4, which project will you finally choose?**
### Explanation of Key Financial Metrics
1. **Payback Period**: This is the time it takes for a project to recover its initial investment from its cash inflows.
2. **Net Present Value (NPV)**: This calculates the present value of cash flows generated by a project, subtracting the initial investment. NPV is a principal indicator of a project's profitability.
3. **Internal Rate of Return (IRR)**: This is the discount rate that makes the NPV of a project zero. It represents the project's potential return rate.
4. **Profitability Index**: This is calculated by dividing the present value of future cash flows by the initial investment. A Profitability Index greater than 1 indicates a good investment.
#### Diagram Explanation
There are no visual diagrams or graphs in this document. The information is presented in tabular form to detail the cash flows for each project over several years, aiding in the computation
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