Air New Zealand is comparing two potential projects with the following cash flows:

The company uses an interest rate of 10 percent on all of its projects. Which project is better according to each of the following capital budgeting methods? 

 1) NPV 

2) Payback 

3) Discounted payback

 4) Internal rate of return 

5) Profitability index
 

Transcribed Image Text:

Project 1: Year 0 12345 2 4 Cash Flow -$53,000 16,700 21,900 27,300 20,400 - 8,600 Project 2: Year 0 01234 2 3 4 Cash Flow -$29,000 12,300 11,000 13,200 9,700 Project 1: Year 0 12345 2 4 Cash Flow -$53,000 16,700 21,900 27,300 20,400 - 8,600 Project 2: Year 0 01234 2 3 4 Cash Flow -$29,000 12,300 11,000 13,200 9,700

Answer rating: 100% (QA)

To determine which project is better using each of the capital budgeting methods we need to calculate the relevant metrics for both projects and compa... View the full answer