Comparing investment criteria. Consider the following two mutually exclusive projects:
Year Cash Flow (A) Cash Flow (B)
0 -$455,000 -$65,000
1 58,000 31,000
2 85,000 28,000
3 85,000 25,500
4 572,000 19,000
Whichever project you choose, if any, you require a return of 11 percent on your investment.
a. If you apply the payback criterion, which investment will you choose? Why?
b. If you apply the discounted payback criterion, which one will you choose? Why?
c. If you apply the NPV criterion, which investment will you choose? Why?
d. If you apply the IRR criterion, which investment will you choose? Why?
e. If you apply the profitability index criterion, which investment will you choose? Why?
f. Based on your answers in (a) through (b), which project will you finally choose? Why?