P10-24

All techniques: Decision among mutually exclusive investments Pound Industries is

attempting to select the best of three mutually exclusive projects. The initial investment

and after-tax cash inflows associated with these projects are shown in the

following table.

Cash flows Project A Project B Project C

Initial investment (CF0) $60,000 $100,000 $110,000

Cash inflows (CFt), t =5 1 to 5 20,000 31,500 32,500

a. Calculate the payback period for each project.

b. Calculate the net present value (NPV) of each project, assuming that the firm has

a cost of capital equal to 13%.

c. Calculate the internal rate of return (IRR) for each project.

d. Draw the net present value profiles for both projects on the same set of axes, and

discuss any conflict in ranking that may exist between NPV and IRR.

e. Summarize the preferences dictated by each measure, and indicate which project

you would recommend. Explain why.