Question about Comparing Investment Criteria
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Comparing Investment Criteria. Consider the following two mutually exclusive projects:
Year Cash Flow (A) Cash Flow (B)
0 -$350,000 -$35,000
1 25,000 17,000
2 70,000 11,000
3 70,000 17,000
4 430,000 11,000
Whichever project you choose, if any, you require a 15 percent return on your investment.
a) If you apply the payback criterion, which investment will you choose? Why?
b) If you apply the discounted payback criterion, which investment will you choose? Why?
c) If you apply the NPV criterion, which investment will you choose? Why?
d) If you apply IRR criterion, which investment will you choose? Why?
e) If you apply the profitability index criterion, which investment will you choose? Why?
f) Based on your answers in (a) through (e), which project will you finally choose? Why?
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Solution Summary
In this Solution the author compares the given investments. Calculations are provided in the attached Microsoft Excel document.
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