Question
A company has to make a choice between two projects namely A & B. The initial capital outlay of two projects are $365,000 and $568,000
A company has to make a choice between two projects namely A & B. The initial capital outlay of two projects are $365,000 and $568,000 respectively for A and B. There will be no scrap value at the end of the life of both the projects. The opportunity cost of capital of the company is 16%. The annual income are as under:
Year Project A Project B
1
15,000
8,500
2
23,000
11,100
3
27,500
15,200
4
19,600
14,700
5
18,400
22,500
6
23,400
28,100
7
35,200
39,200
8
38,100
50,400
9
39,000
82,400
10
45,150
79,200
11
46,800
98,640
12
48,630
110,800
13
52,180
61,400
14
50,280
70,560
15
61,890
52,400
There will be additional cash outflow of $23,000 and $31,000 at the end of 8 year for project A and B respectively.
Analyze which project is better for the company using following approaches:
1. Net present value 2. Payback period 3. Discounted payback period 4. Profitability index
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