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NPV/IRR/Profitability Index

Consider the data on the following two mutually exclusive projects under consideration by the Stephen Company:

Year
Project A
Project B

0
-30,000
-60,000

1
10,000
20,000

2
10,000
20,000

3
10,000
20,000

4
10,000
20,000

5
10,000
20,000

The cost of capital is 14%.

Given this information, calculate the following values for each project using the time value tables in the text:

à? NPV

à? IRR (Round to the nearest whole percentage.)

à? Profitability index

à? Payback period

Discuss your findings.

Solution Preview

Here the cash flows for both the projects are in the nature of an annuity, since they are same in each period. We can use the PVIFA table to get the present values.

1. NPV - NPV is the sum of the presesnt value of cash flows from which the intial investment is subtracted. For project A, the cash inflow is 10,000. The time period is 5 yrs and the discount rate is 14%. We can get the annuity factor from PVIFA table for 5 yrs, 14%. It is 3.433. The PV of the cash inflows is 10,000X3.433 = 34,330. The NPV is 34,330-30,000 = 4,330.
For Project B is ...

Solution Summary

The solution explains the calcuation of NPV,IRR and Profitability Index given the cash flows.

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