The following two projects of equal risk are mutually exclusive alternatives for expanding the firm's capacity. The firm's cost of capital is 10%. The cash flows for each project are given in the following table.
|
PROJECT A |
PROJECT B
|
|
Initial investment
|
200,000
|
45,000
|
|
Year
|
Net cash inflows
|
Net cash inflows
|
|
1
|
60,000
|
13,000
|
|
2
|
49,000
|
21,500
|
|
3
|
135,000
|
18,000
|
|
4
|
175,000
|
25,200
|
Required:
(i) Calculate the net present value for each project. Using the net present value criterion, which project is preferable?
(ii) Calculate each project's payback period. Using the payback period criterion which project is preferable?
(iii) Calculate the profitability index. Using the profitability index criterion which project is acceptable?