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NPV, IRR, and Payback for Two Mutually Exclusive Projects

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1. Consider the following two mutually exclusive projects:

Year CF (A) CF (B)
0 -2000 -100,000
1 1500 50,000
2 200 20,000
3 500 30,400

Whichever project you choose, if any, you require a 10 percent return on your investment.

a. If you apply the payback criterion, which investment will you choose? Why?
b. If you apply discounted payback criterion, which investment will you choose? Why?
c. If you apply 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 method seems inappropriate to use to evaluate these projects? Why. Which investment will you finally choose? Why?

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Solution Summary

Provides steps necessary to calculate NPV, IRR and payback.

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