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    Calculation of NPV, IRR, Payback and Profitability Index

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    There are two mutually exclusive projects under consideration by the
    Stephen Company. The following is the expected cash flows from the

    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%.
    Please calculate the following for each project:
    ? NPV
    IRR (Round to the nearest whole percentage)
    ? Profitability index
    ? Payback period

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    Solution Preview

    Project A -
    NPV - The cash flows are in the nature of annuity. We can find the NPV by getting the present value of the cash flows using the PVIFA table. From the table under 14% and 5 years, we get the factor as 3.433. The PV of the cash flows is 10000 X 3.433 = 34,330. The NPV is -30,000+34,330=$4,330.
    IRR - IRR is the rate at which the NPV is zero or the PV of ...

    Solution Summary

    The solution explains how to calculate NPV, IRR, Payback and Profitability Index of a project