Problem:
Consider the following two mutually exclusive projects, each of which requires an initial investment of $100,000 and has no salvage value. The organization, which has a cost of capital of 15%, must choose one or the other (see below)
Cash Inflows (End of year)
Year Project A Project B
1 $30,000 $0
2 $30,000 $20,000
3 $30,000 $20,000
4 $30,000 $50,000
5 $30,000 $90,000
Q1. Compute the payback period of these projects. Using the payback criterion, which project is more desirable?
Q2. Compute the net present value of these two projects. Using the net present value criterion, which project is more desirable?
Q3. What do you think about the idea of using the payback period to adjust for risk?
Q4. How do you think about the idea of using the payback period to adjust for risk?
Q5. Compute the internal rate of return for each project
Q6. Assuming the straight-line depreciation is used to compute income, compute the accounting rate of return for these two projects
Q7. What do you think of the accounting rate of return criterion?