Question
The following two projects of equal risk are mutually exclusive alternatives for expanding the firm's capacity. The firm's cost of capital is 15%. The cash
The following two projects of equal risk are mutually exclusive alternatives for expanding the firm's capacity. The firm's cost of capital is 15%. The cash flows for each project are given in the following table. Year Cash Flow in AU$ (Project A) Cash Flow in AU$ (Project B) 0 -210,000 -45,000 1 75,000 8,000 2 80,000 10,500 3 102,000 19,500 4 125,000 18,200 Required: a) Calculate each project's payback period. Using the payback period criterion which project is preferable? b) Calculate the net present value for each project. Using the net present value criterion, which project is preferable? c) Verify whether the IRR is above or below 25% for each project. Using the internal rate of return criterion, which project is preferable? d) Calculate the profitability index. Using the profitability index criterion which project is acceptable?
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