a.

Payback

To determine the payback, construct the cumulative cash flows for each projects:

Project X Project Y
Year Cash Flows Cumulative CF Cash Flows Cumulative CF
0 ($10,000) ($10,000) ($10,000) ($10,000)
1 6500 (3500) 3500 (6500)
2 3000 (500) 3500 (3000)
3 3000 2500 3500 500
4 1000 3500 3500 4000

$ 500
Paybackx = 2+ = 2.17 years.
$ 3000
$ 3000
Paybackx = 2+ = 2.87 years.
$ 3 5 00
Net Present value (NPV):

$ 6500 $ 3000 $ 3000 $ 1000

NPVX = -$10000 + 1 + 2 + 3 + 4
(1.12) (1.12) (1.12) (1.12)
= $10,000 + $5,803.57+ $2,391.58 + $2,135.34 + $635.52

= $966.02

$ 3 500 $ 3 5 00 $ 3 5 00 $ 3500
NPV Y = - $10000 + 1 + 2 + 3 + 4
(1.12) ( 1.12) ( 1.12) (1.12)

= - $10,000 + $3,125.00 + $2,790.18 + $2,491.23 + $2,224.31

= $630.72

Alternatively, 'using a financial calculator, input the cash flows into the cash flow register,

Enter I = 12, and then press the NPV key to obtain NPV X= $966.01 and NPVY = $630.72,

Internal rate of return (IRR): To solve for each project's IRR, find the discount rates: that equate
each NPV to zero:

IRRX = 18.0%

IRRY = 15.0%.

Modified internal rate of return (MIRR):

 TV
PV of cash outflows = n
(1+ MIRR)

Cost =
∑ CIFt (1+r )n−t
t=1

(1+ MIRR)n

$10000 = $ 6500 ¿ ¿

$ 17,255.23
$10,000 = 4
(1+ MIRRx )
$ 17,255.23
(1+ MIRRx )4 =
$ 10,000
1
MRRX = (1.725523)4 – 1.0

= 0.1481
= 14.81%

$10000 = $ 3 500¿ ¿

$ 16 , 727.65
$10,000 =
(1+ MIRR y )4

$ 16,727.65
(1+ MIRR y )4 =
$ 10,000
1
MRRX = ( $ 16,727.65) 4 – 1.0

= 0.1373
= 13.73%
Discounted Payback Period (PBDisc):
To determine the discounted payback, construct the cumulative discounted
cash flows for each project:
 Project X Project Y
Year PV CF @ 12% Cumulative CF PV CF @ 12% Cumulative CF
0 ($10,000.00) ($10,000.00) ($10,000.00) ($10,000.00)
1 5,803.57 (4196.43) 3125.00 (6,875.00)
2 2,391.58 (1,804.85) 2790.18 (4,084.82)
3 2,135.34 330.49 2,491.23 (1,593.59)
4 635.52 966.01 2,224.31 630.72

$ 1,804.85
PBDiscX = 2+ = 2.85 years
$ 2,13 5.34
$ 1,593.59
PB DiscY = 3+ = 3.72 years
$ 2,224.31

b. The following table summarizes the project Rangkings by each method:

Project that Ranks higher

Traditional Payback X
NPV X
IRR X
MIRR X
PBDisc X

Note that all methods rank Project X over Project Y. In addition, both
projects are acceptable under the NPV, IRR, MIRR, and PBDisc criteria.
Thus, both projects should be accepted if they are independent.