Answer to Question #265896 in Management for ankita

Question

Expected Cash Flows Year Project A Project B 0 -500 -875 1 100 150 2 110 200 3 120 250 4 175 375 5 240 530 6 300 680 a. If you were told that each project’s cost of capital was 12%, which project should be selected using the NPV criteria? b. What is the profitability index for each project if the cost of capital is 12%? c. What is the regular payback period for these two projects? 

Answer 1

(a) As per the NPV criteria, project B should be selected because the NPV of project B is higher than the NPV of project A.

(b) The IRR of project A and project B is 19.12% and 27.54% respectively.

It is computed by using the following method:

(c) The regular payback period of project A and project B is 3.62 years and 2.90 years respectively.

(d) The profitability index of project A and project B is 1.23 and 1.51 respectively.