The table below gives the initial investment and expected cash flows over the next five years for
Question:
The table below gives the initial investment and expected cash flows over the next five years for two different projects. Assume that the industry you are in expects a return of 10%, which you use as the discount rate in net present value (NPV) calculations and as the required rate of return for purposes of deciding on projects. Also, assume that management only wants to invest in projects that payoff within four years.
For each project, compute the payback period, NPV, and internal rate of return (IRR). Then explain whether each project should be accepted based on these three criteria.
Project A | Project B | |
Initial Investment | $40,000 | $28,000 |
Year | Cash Flows | |
1 | $10,000 | $10,000 |
2 | $10,000 | $13,000 |
3 | $10,000 | $5,000 |
4 | $10,000 | $5,000 |
5 | $10,000 | $6,000 |
Mathematical Applications for the Management Life and Social Sciences
ISBN: 978-1305108042
11th edition
Authors: Ronald J. Harshbarger, James J. Reynolds