a.

Payback Period:
Advantages of the method include
(1) It is simple to compute and easy to understand and
(2) it handles investment risk effectively.
Disadvantages of the method include
(1) it does not recognize the Time Value of Money and
(2) it ignores profitability of an investment.

b. Profitability Index:
Advantage: It uses time value of money. It is similar to the NPV, and, is easy to interpret.

Disadvantage: Similar to the IRR, it may give the wrong decision when choosing between
mutually exclusive projects.

c. Internal Rate of Return

Advantage of IRR: It takes into account the time value of money.
Disadvantage of IRR:
(1) It can generate two answers for the same input. (if there are more than one negative
cashflow years).
(2) IRR can pick the wrong project when choosing between two mutually exclusive
projects.

d. Net Present Value

Advantage: NPV is the most widely accepted tool for analyzing projects. It takes into account
the time value of money.
Disadvantage: It does not take into account the risk of the project. Sometimes companies
compensate for risk by raising the expected return on a risky project.

6.
Project A Project B

Initial Outlay 4000 4000

Year Net Cash Flow Each Period 14% discount rate 14% discount rate

1 2,003 .877 1756.631

2 2,003 .769 1540.307

3 2,003 .675 1352.025

4 2,003 .592 1185.776 10,736 6,355.712