4 FIN WK 4

Payback Period (Project A) = − $110,000 + $20,000 + $30,000 + $40,000 + $20,000

= 3 + 20,00050,000

= 3.4 years

Payback Period (Project B) = − $110,000 + $40,000 + $40,000 + $30,000

= 2 + 30,00040,000

= 2.75 years

NPV (Project A) = − $110,000 + $20,000(1.12) + $30,000(1.12)2 + $40,000(1.12)3 + $50,000(1.12)4 + $70,000(1.12)5

= $31,739.95

NPV (Project B) = − $110,000 + $40,0001 - 1(1 + 0.12)50.12

= $34,191.05

IRR (Project A): 0 = − $110,000 + $20,000(1 + r) + $30,000(1 + r)2 + $40,000(1 + r)3 + $50,000(1 + r)4 + $70,000(1 + r)5

By trial and error, IRR (Project A) ≈ 20.97%

IRR (Project B): 0 = − $110,000 + $40,0001 - 1(1 + r)5r

By trial and error, IRR (Project B) ≈ 23.92%

If we rely on the court date, which requires a recovery period of no more than three years, the B project should be accepted, since its payback period is less than three years and a project should be rejected if the recovery period exceeding three years.

If we analyze the NPV, the two projects should be accepted, since both have positive NPV projects.

Based on the IRR, both projects should be accepted, since the two projects have IRR exceeding the discount rate of the company (12%). Limitations that may make mutually exclusive and not independent projects are:

1. The same products for both projects - if the products added to the product line Avalon therefore projects are very similar, then an increase in selling camera of a project product sales decrease from another project making useless to have both.

2. Lack of resources and above all time - the company may have to give more time to carry out two projects at the same time and this will not do good for the company. The completion of both projects may also require additional resources, for example additional specialists in the field of marketing, which may take time to find and hire.

3. Financial constraints or budget - the company may run out of enough money to fund both projects.