Bayan Company is considering the following two projects. Projected cash flows for these ventures are as following

Bayan Company is considering the following two projects. Projected cash flows for these ventures are as following

 

 

answer:

Initial Outlay DF at 12% Present value
Year Plan X Plan Y Plan X Plan Y
A B C D=A*C E=B*C
0 -2000 -7000 1 -2000 -7000
1 1000 3000      0.8929 892.85714 2678.5714
2 1000 4000      0.7972 797.19388 3188.7755
3 1000 5000      0.7118 711.78025 3558.9012
4 1000 6000      0.6355 635.51808 3813.1085
NPV = sum 0 to 4     1,037.35     6,239.36
PI = 1+(NPV/initial outlay)    1.518675    1.891337
For payback calculation-X For payback calculation-Y
Year Cash flow C. Cash flow Payback Year Cash flow C. Cash flow
0 -2000 -2000 0 -7000 -7000
1 1000 -1000 1 3000 -4000
2 1000 0 Yr 2 2 4000 0 Yr 2
3 1000 1000 3 5000 5000
4 1000 2000 4 6000 11000
a Both the project pass the hurdle rate of 12% and have positive NPV, so both can be taken
b If mutually exclusive, then Plan X should be undertaken since its has higher PI and NPV
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