Question: Consider the following two mutually exclusive projects:
| Year |
Cash Flow (A) |
Cash Flow (B) |
| 0 |
-$455,000 |
-$65,000 |
| 1 |
58,000 |
31,000 |
| 2 |
85,000 |
28,000 |
| 3 |
85,000 |
25,500 |
| 4 |
572,000 |
19,000 |
Whichever project you choose, if any, you require a return of 11 percent on your investment.
a. If you apply the payback criterion, which investment will you choose? Why?
b. If you apply the discounted payback criterion, which investment will you chose? Why?
c. If you apply the NPV criterion, which investment will you choose? Why?
d. If you apply the IRR criterion, which investment will you choose? Why?
e. If you apply the profitability index criterion, which investment will you choose? Why?
f. Based on your answers in (a) through (e), which project will you finally choose? Why?