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Cash Flow Analysis: Projects A & B

The document presents cash flow information for two projects, Project A and Project B, over 4 years. It calculates the NPV, IRR, and profitability index for each project. Project A has a higher NPV of $11,058.07 compared to Project B's NPV of $3,434.16. The IRR is higher for Project B at 19.5% than Project A at 16.2%. Both projects have a profitability index over 1, with Project B at 1.086 being higher than Project A at 1.037.

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Safraz Bacchus
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22 views5 pages

Cash Flow Analysis: Projects A & B

The document presents cash flow information for two projects, Project A and Project B, over 4 years. It calculates the NPV, IRR, and profitability index for each project. Project A has a higher NPV of $11,058.07 compared to Project B's NPV of $3,434.16. The IRR is higher for Project B at 19.5% than Project A at 16.2%. Both projects have a profitability index over 1, with Project B at 1.086 being higher than Project A at 1.037.

Uploaded by

Safraz Bacchus
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd

Year Cash Flow (A) Cash Flow (B) a) Payback criterion

0 ($300,000) ($40,000)
1 20,000 19,000 Payback period A = 3+
2 50,000 12,000
3 50,000 18,000 Payback period A = 3.46
4 390,000 10,500

R 15%
Payback period B = 2+

NPVA $11,058.07 Payback period B = 2.50


NPVB $3,434.16

b) NPV = PV (revenues) - PV(costs)

NPVA = -300000 + 20000 + 50000 +


(1 + .15) (1 + .15)^2
NPVA = $11,058.07

NPVB = -40000 + 19000 + 12000 +


(1 + .15) (1 + .15)^2
NPVB = $3,434.16

$250,000
c) IRR
Project A 16.20%
$200,000
Project B 19.50%

$150,000
NPV

17.85%

$100,000

$50,000

$0
0% 5% 10% 15% 16% 17% 18% 19%

($50,000)
Discount rate
$0
0% 5% 10% 15% 16% 17% 18% 19%

($50,000)
Discount rate

d) Profitability Index

PI = PV of cash flows subsequent to initial investment


Initial investment

PI of Project A = 1.037

PI of Project B = 1.086
(300000 - 120000)
390000
yrs

(40000 - 31000)
18000
yrs

50000 + 390000
(1 + .15)^3 (1 + .15)^4

18000 + 10500
(1 + .15)^3 (1 + .15)^4

Year Cash Flow (A)

0 ($300,000)
1 20,000
2 50,000
3 50,000
4 390,000
Project A
Project B

% 10% 15% 16% 17% 18% 19% 20%

Discount rate
% 10% 15% 16% 17% 18% 19% 20%

Discount rate

Cash Flow
Year PV
(A)
0 ($300,000)
1 20,000 $17,391.30
2 50,000 $37,807.18
3 50,000 $32,875.81
4 390,000 $222,983.77
$311,058.07
R 15%

Cash Flow
Year PV
(B)
0 ($40,000)
1 19,000 $16,521.74
2 12,000 $9,073.72
3 18,000 $11,835.29
4 10,500 $6,003.41
$43,434.16
Cash Flow (B)
r Project A Project B
($40,000) 0% $210,000 $19,500
19,000 5% $128,445 $13,167
12,000 10% $63,445 $7,885
18,000 15% $11,058 $3,434
10,500 16% $1,826 $2,628
17% ($7,038) $1,847
18% ($15,552) $1,091
19% ($23,733) $358
20% ($31,597) ($353)

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