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Paypack period and choosing projects

3. Bagel Pantry Inc. is considering the following two projects. The company's cost of capital is 12%. The projected cash flows are summarized as follows:

Time Project A Project B
0 $(25,000) $(23,000)
1 14,742 6,641
2 14,742 6,641
3 14,742 6,641
4 6,641
5 6,641
6 6,641

a. What is the IRR for Project B? Should this project be accepted based on the IRR?
b. What is the payback period for Project B?
c. What is the PI for project B? Should this project be accepted based on the PI?
d. If Project A and B are mutually exclusive projects, which one should be accepted based on the replacement chain analysis? Please show your work.

Solution Preview

a. What is the IRR for Project B? Should this project be accepted based on the IRR?

For project B, in a financial calculator, enter PV = -23000, PMT=6641, and N=6, then compute Interest RATE = 18.4%
(alternatively, you can use EXCEL command "=RATE(6;6641;-23000)")
Since IRR > cost of capital 12%, the project could be ...

Solution Summary

This provides an example of finding internal rate of return and payback period.

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