Compute the NPV, IRR, PI, the payback periods, and the discounted payback periods for the following projects. Assume a discount rate of 11 percent.
|
Project
|
C0
|
C1
|
C2
|
C3
|
C4
|
C5
|
|
A
|
-1,000
|
400
|
400
|
400
|
500
|
500
|
|
B
|
-6,000
|
1,500
|
1,500
|
1,500
|
1,500
|
1,500
|
|
C
|
-17,000
|
0
|
0
|
0
|
24,200
|
8,200
|
A and B are mutually exclusive projects. Project A requires an initial outlay of $80,000 and generates cash flows of $18,000 per year for 8 years. Project B requires an outlay of $40,000 and generates cash flows of $10,000 per year for 8 years. Compute the NPV and IRR for each of the two projects. Assume that the discount rate is 10%. Which project would you select and why?