Question
The Next Best Thing Company is considering three mutually exclusive projects Project A, Project B, and Project C as it aims to expand its manufacturing
The Next Best Thing Company is considering three mutually exclusive projects Project A, Project B, and Project C as it aims to expand its manufacturing capacity. The company will only consider a project that will repay the initial investment within 5 years. The cost of capital for the company is 11%. The company has started the analysis of the projects and the results for Project A and Project B are shown in the table below.
| Project A | Project B | Project C | |
| Payback (Years) | 4.65 | 2.62 | 3.09 |
| Discounted Payback (Years) | 5.24 | 3.15 | 3.84 |
| Net Present Value | $53,052 | $17,931 | 45376.95 |
| Profitability Index | 1.38 | 1.03 | 1.38 |
The cash flows for Project C are as follows:
| Year | Cash flow |
| 0 | $ (465,000) |
| 1 | 95,000 |
| 2 | 135,000 |
| 3 | 130,000 |
| 4 | 145,000 |
| 5 | 195,000 |
Required:
Compute the following for Project C,
Payback period
Discounted payback period
Net present value
Profitability index
State which of the three projects should be chosen, and why?
What is the difference between mutually exclusive projects and independent projects?
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