Calculate Payback Period, Net Present Value And Internal Rate Of Return To Choose Between Two Projects

Question

Consider two mutually exclusive investment projects, project A and project B. You are given project A has an expected life of 3 years and project B has an expected life of 9 years. Project A has expected future net cash flows in each of years 1-3 of $12,600. Project B has expected future net cash flows in each of years 1-9 of $6,700. The initial investment required for each project is $20,000. Assume a required rate of return of 15% per annum for each project.

(a) Calculate the payback period for project A and for project B.

(b) Calculate the net present value (NPV) for project A and for project B.

(c) Calculate the internal rate of return (IRR) for project A and for project B.

(d) Is project A an acceptable investment project? Is project B an acceptable investment project? Explain your answers.

Summary

The question belongs to Finance and it discusses about calculation of payback period, net present value, profitability index and internal rate of return for two projects and select the best out of the two.

Total Word Count 386