Working with your assigned group, please determine your answer to the questions below. We will discuss your group's responses during the live session this week.Consider the following two mutually exclusive projects:YearCash Flow ($) - ACash Flow ($) - B0-4,55,000-65,000158,00031,000285,00028,000385,00025,50045,72,00019,000 Whichever project you choose, if any, you require a return of 11% on your investment.If you apply the payback criterion, which investment will you choose? If you apply the discounted payback criterion, which investment will you choose? If you apply the NPV criterion, which investment will you choose? If you apply the IRR criterion, which investment will you choose? If you apply the profitability index criterion, which investment will you choose? Based on your answers, which project will you finally choose?

Since you have asked a question with multiple parts, we will solve the first 3 parts for you. Please ask remaining parts separately or resubmit the question and mention the remaining parts which need to be solved. Required Return = 11% Year Cash Flow ($) - A Cash Flow ($) - B 0 -455,000 -65,000 1 58,000 31,000 2 85,000 28,000 3 85,000 25,500 4 572,000 19,000 Answer 1) Payback period = Number of years preceding to which investment in recovered + ((Initial Investment - Sum of cash flows in year preceding to which investment in recovered) / Cash flow in which investment in recovered) Investment A Payback period = 3 + ((455,000 - (58,000+85,000+85,000)) / 572,000) Payback period = 3 + (227,000/ 572,000) Payback period = 3.40 years Investment B Payback period = 2 + ((65,000 - (31,000+28,000)) / 25,500) Payback period = 2 + (6,000/ 25,500) Payback period = 2.24 years Investment B will be preferred using payback criterion since it has a shorter payback period. Answer 2) Year Cash Flow ($) - A Present Value of Cash Flows = Cash Flow / (1+Interest Rate)Year Working Cash Flow ($) - B Present Value of Cash Flows = Cash Flow / (1+Interest Rate)Year Working 0 -455,000 -455,000.00 (-)455,000/(1.11)^0 -65,000 -65,000.00 (-)65,000/(1.11)^0 1 58,000 52,252.25 58,000/(1.11)^1 31,000 27,927.93 31,000/(1.11)^1 2 85,000 68,987.91 85,000/(1.11)^2 28,000 22,725.43 28,000/(1.11)^2 3 85,000 62,151.27 85,000/(1.11)^3 25,500 18,645.38 25,500/(1.11)^3 4 572,000 376,794.12 572,000/(1.11)^4 19,000 12,515.89 19,000/(1.11)^4 SUM = 105,185.54 16,814.62 Discounted Payback period = Number of years preceding to which investment in recovered + ((Initial Investment - Sum of discounted cash flows in year preceding to which investment in recovered) / Discounted Cash flow in which investment in recovered) Investment A Discounted Payback period = 3+ ((455,000 - (52,252.25+68,987.91+62,151.27)) / 376,794.12) Discounted Payback period = 3.72 years Investment B Discounted Payback period = 2+ ((65,000 - (27,927.93+22,725.43)) / 18,645.38) Discounted Payback period = 2.77 years Investment B will be preferred using discounted payback criterion since it has a shorter discounted payback period. Answer 3) NPV = Sum of present value of cash flows Investment A NPV = Sum of present value of cash flows NPV = 105,185.54 Investment B NPV = Sum of present value of cash flows NPV = 16,814.62 Investment A will be preferred since it has a higher net present value and adds more value to the firm and shareholder's wealth.

Answered: Working with your assigned group,…

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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Year	Cash Flow ($) - A	Cash Flow ($) - B
0	-4,55,000	-65,000
1	58,000	31,000
2	85,000	28,000
3	85,000	25,500
4	5,72,000	19,000