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Homework answers / question archive / The following data are given for two mutually exclusive project proposals: (PhP) Project A Project B Initial Investment 50,000
The following data are given for two mutually exclusive project proposals:
(PhP) Project A Project B
Initial Investment 50,000.00 60,000.00
Annual Net Cash Inflows:
Year 1 15,000.00 30,000.00
Year 2 14,000.00 14,000.00
Year 3 12,000.00 10,000.00
Year 4 12,000.00 10,000.00
Year 5 12,000.00 10,000.00
Assuming that the firm's required rate of return is 20%, compute the following:
a) Accounting Rate of Return
b) Accounting Payback
c) Net Present Value
d) Internal Rate of Return
e) Discounted Payback Period
f) Profitability Index
Which project would you undertake? Justify.
a) Computation of the accounting rate of return (ARR) for project A:-
Average annual cash flows = ($15,000 + $14,000 + $12,000 + $12,000 + $12,000) / 5
= $65,000 / 5
= $13,000
ARR = Average annual cash flows / Initial investment
= $13,000 / $50,000
= 26%
Computation of the accounting rate of return (ARR) for project B:-
Average annual cash flows = ($30,000 + $14,000 + $10,000 + $10,000 + $10,000) / 5
= $74,000 / 5
= $14,800
ARR = Average annual cash flows / Initial investment
= $14,800 / $60,000
= 24.67%
b) Accounting payback:
c) Net present value:
d) Internal rate of return:
e) Discounted payback period can not be calculated for both project because the cash flows will not recover in given period.
f) Profitability index:
None of project should be undertaken because the NPV is negative, IRR is less than the required return & PI is less than 1. So, both the project should not be accepted.
