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Consider the following two mutually exclusive projects: Year _________Cash Flow (A) _____Cash Flow (B) 0 .................-$455,000.................. -$65,000

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Consider the following two mutually exclusive projects:

Year _________Cash Flow (A) _____Cash Flow (B)

0 .................-$455,000.................. -$65,000

1.................... 58,000......................31,000

2....................85,000......................28,000

3....................85,000......................25,500

4...................572,000.....................19,000

Whichever project you choose, if any, you require a return of 11 percent on your investment.

a. If you apply the payback criterion, which investment will you choose? Why?

b. If you apply the discounted payback criterion, which investment will you choose? Why?

c. If you apply the NPV criterion, which investment will you choose? Why?

d. If you apply the 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 project will you finally choose? Why?

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Input area Annual cash flows A B Year 0 455000 65000 Year 1 58000 31000 Year 2 85000 28000 Ye...View the full answer


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Fundamentals of Corporate Finance

Fundamentals of Corporate Finance

ISBN: 978-0077861704

11th edition

Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan

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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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