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Calculating Payback period, NPV and IRR

Caledonia is considering two additional mutually exclusive projects. The cash flows associated with these projects are as follows:

Year Project A Project B
0 -$100,000 -$100,000
1 32,000 0
2 32,000 0
3 32,000 0
4 32,000 0
5 32,000 $200,000

The required rate of return on these projects is 11%.

1. What is each project's payback period?
2. What is each project's net present value?
3. What is each project's internal rate of return?
4. What has caused the ranking conflict?
5. Which project should be accepted? Why?

Solution Preview

Please refer attached file for better clarity of tables and formulas.

Solution:

1. What is each project's payback period?
Year Cash Flows Cumulative cash flows
Project A Project B Project A Project B
0 -100000 -100000
1 32000 0 32000 0
2 32000 0 64000 0
3 32000 0 96000 0
4 32000 0 128000 0
5 32000 200000 160000 200000
Payback period is time needed to recover initial outlay.

In case of Project A, it is clear ...

Solution Summary

Solution describes the steps for calculating payback period, net present value and internal rate of returm for given projects. It also discusses ranking conflict.

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