Year Investment A Investment B 0 (400,000) (450,000) 1 75,000 60,000 2 75,000 60,000 3 100,000 125,000 4 100,000 125,000 5 100,000 125,000 6 140,000 125,000 (i) Calculate the Payback period and the Average Rate of Return FOR EACH investment and explain in each case which would be the more attractive. (ii) Calculate the NPV for each investment assuming a discount rate of 12% and explain in this case which would be the more attractive. (iii) Calculate the IRR for each investment and explain in this case which would be the more attractive.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows

Section: Chapter Questions

Problem 23SP: Start with the partial model in the file Ch10 P23 Build a Model.xlsx on the textbooks Web site....

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Your investment client has been offered the following two mutually exclusive investments:

Year Investment A Investment B

0 (400,000) (450,000)

1 75,000 60,000

2 75,000 60,000

3 100,000 125,000

4 100,000 125,000

5 100,000 125,000

6 140,000 125,000

(i) Calculate the Payback period and the Average Rate of Return FOR EACH investment and explain in each case which would be the more attractive.

(ii) Calculate the NPV for each investment assuming a discount rate of 12% and explain in this case which would be the more attractive.

(iii) Calculate the IRR for each investment and explain in this case which would be the more attractive.

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