Question: A company has to make a choice between two projects namely A & B. The initial capital outlay of two projects are $365,000 and $568,000

A company has to make a choice between two projects namely A & B. The initial capital outlay of two projects are $365,000 and $568,000 respectively for A and B. There will be no scrap value at the end of the life of both the projects. The opportunity cost of capital of the company is 16%. The annual income are as under:
Year Project A Project B

1 15000 8500

2 23000 11100

3 27500 15200

4 19600 14700

5 18400 22500

6 23400 28100

7 35200 39200

8 38100 50400

9 39000 82400

10 45150 79200

11 46800 98640

12 48630 110800

13 52180 61400

14 50280 70560

15 61890 52400

There will be additional cash outflow of $23,000 and $31,000 at the end of 8 year for project A and B respectively.
Analyze which project is better for the company using following approaches:
1. Net present value 2. Payback period 3. Discounted payback period 4. Profitability index

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Solution a To calculate the net present value NPV of each project we need to discount the cash flows of each year using the opportunity cost of capita... View full answer

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