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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
projects:

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 Summary

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

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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 ...

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