Question: VDSL Company has two mutually exclusive projects. Below is a table representing the initial investment and cash flows for these projects over four (4) years.
- VDSL Company has two mutually exclusive projects. Below is a table representing the initial investment and cash flows for these projects over four (4) years.
|
| Project A | Project B |
| Year | Cash Flow | Cash Flow |
| $ | $ | |
| 0 | -750,000 | -750,000 |
| 1 | 250,000 | 200,000 |
| 2 | 350,000 | 400,000 |
| 3 | 250,000 | 100,000 |
| 4 | 200,000 | 175,000 |
a. If the companys required rate of return is 8%, calculate the Profitability Index of each project and determine which project is the best investment.
b. If the company wishes to recover the investment in 2.5 years, calculate the payback period of each project and determine which project is the best investment.
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