Question

Question 1:
Part a: Evaluate a 4 - year project costing $25,000 and returning $8,000 annually using the payback period technique and a 3-year cutoff.
Answer: 3.125 Years

Part b: Evaluate the project in Problem #1 using the profitability index method and a 10% required return.

Part c: Evaluate the project in part "a" using the IRR method and a 10% required rate

Please show work and formula used

Answer 1

fc =IRR(13:17) I J K 1 Project B year Cash flows pv@10% Present value Cumulative Cash flows 0 $ 25,000.00) 1.0000 $ (25,000.00) $ 25,000.00) 1 $ 8,000.00 0.9091 $ 7,272.73 $ (17,000.00) 21 $ 8,000.00 0.8264 $ 6,611.57 $ (9,000.00) 3 $ 8,000.00 0.7513 $ 6,010.52 $ (1,000.00) 4 $ 8,000.00 0.6830 $ 5,464.11 $ 7,000.00 10.66%|NPV 358.92 ARR a Payback Period = 3+1000/8000 3.125 Years Do not accept because payback period is more than 3 years b PI 1+NPV/Initial Investment 1+358.92/25000 1.014 Accept the Project because Pl is more than 1 c Accept the Project because IRRis more than 10%

18 fx =IRR(13:17) H pv@10% 1 Project B 2 year 3 0 4 1 52 6 3 74 IRR Cash flows -25000 8000 8000 8000 8000 =IRR(13:17) =3/1.1 =14/1.1 =J5/1.1 1=J6/1.1 UNPV Present value =13*13 =14*14 =15*J5 =16*J6 =17*17 =SUM(K3:K7) Cumulative Cash flows =13 =L3+14 L4+15 =L5+16 =L6+17 a Payback Period 3+1000/8000 =3+1000/8000 Years Do not accept because payback period is mo b PI 1+NPV/Initial Investment 1+358.92/25000 =1+358.92/25000 Accept the Project because Pl is more than c Accept the Project because IRRis more than