QUESTION:

Use the information below to answer the following questions.

YEAR

0 (now)

1

2

3

4

5

6

PROJECT A

- 25,950

5,009

-1,123

6,500

7,089

7,544

8,908

PROJECT B

- 31,950

8,000

7,500

7,000

6,500

-2,123

5,500

(a) Compute the payback period for both projects. Using the payback method, which project will be accepted?

(b) If the interest (discount) rate is 12.5 %, what is the net present value (NPV) for both projects? Which project will be accepted using the NPV rule?

(c) What are the profitability indices for both projects? Which project will be accepted using the profitability index rule?

(d) State the steps for using the reinvestment method of evaluating projects with different lives.