Consider the following two mutually exclusive projects, each of which require an initial investment of $100,000 and
Question:
Consider the following two mutually exclusive projects, each of which require an initial investment of $100,000 and have no salvage value. This organization, which has a cost of capital of 15%, must choose one or the other, ignore taxes.
Year Project A Project B
1 $10,000 $50,000
2 20,000 40,000
3 30,000 30,000
4 40,000 20,000
5 50,000 10,000
a. Compute the payback period of these two projects. Using the payback criterion, which
project is more desirable?
b. Calculate the Net Present Value for each project
c. Calculate the profitability index
d. Which is the better investment? Why?
Financial Accounting: A Business Process Approach
ISBN: 978-0136115274
3rd edition
Authors: Jane L. Reimers