Problem:
You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value
|
Year
|
Project(A)
|
Project (B)
|
|
0
|
-$30,000
|
-$25,000
|
|
1
|
10,000
|
8,000
|
|
2
|
11,000
|
8,000
|
|
3
|
12,000
|
8,000
|
|
4
|
13,000
|
8,000
|
The required rate of return is 10%.
Task:
Question 1: What is the NPV for each of the projects? Which project should be accepted if NPV method is applied? Explain why.
Question 2: What is the IRR for each of the projects? Which project should be accepted if IRR method is applied? Explain why.
Question 3: What is the payback period for each of the projects? Which project should be accepted if payback period method is applied? Explain why.
Question 4: What is the discounted payback period for each of the projects? Which project should be accepted if discounted payback period method is applied? Explain why.
Question 5: What is the profitability index for each of the projects? Which project should be accepted if profitability index method is applied? Explain why.
Question 6: Find the crossover rate. Show the equation.
Question 7: Sketch the NPV profile. You must plot at least 5 points for the profile: two points on the x and y axis each, and the cross-over rate on the x axis.
Note: Please provide equation and explain comprehensively and give step by step solution.