Question
Electronic Innovations Limited is considering two separate projects A and B. The cash flow projections for each year are as follows: Years 0 1 2
Electronic Innovations Limited is considering two separate projects A and B. The cash flow projections for each year are as follows:
Years 0 1 2 3 4
Project A -$62,000 28,000 24,800 29,600 20,800
Project B -$120,000 48,000 47,000 46,000 45,000
The required return is 12% for both projects and they are mutually exclusive projects.
a. Calculate the payback periods. Which project would you choose if you apply the payback period criterion?
b. What is the profitability index (PI) for each project and which project would you choose based on PI?
c. What is the NPV for each project and which project would you choose based on NPV?
d. If the internal rates of return (IRR) were 25% for project A and 20% for project B, which project would you choose based solely on IRR and why?
e. Based on your answers for (a) through to (d), which project would you finally choose and why?
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