Solved: Evaluating the payback period, Finance Basics

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Evaluating the payback period

Problem: The Bingo Corporation is in the process of determining which of the following two projects they should invest in the details are below

PROJECT A B

COST OF CAPITAL 12% 12%
LIFE OF PROJECT 20 YEARS 20 YEARS
ANNUAL CASH FLOW $350,000 $400,000
INITIAL COST $1,250,000 $1,400,000
SALVAGE VALUE $250,000 $110,000

QUESTION

A. What is the payback period

B. What is the NPV of the two projects

C. What is the IRR of the two projects

D. What is the profitability index

E. Which of the two projects will you choose and which criteria would you use

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