Earnings Amortized

Capital Cost $80,000

Year 1 $3,000 $60,000
Year 2 $5,000 $40,000
Year 3 $7,000 $20,000 $17,000 $120,000
Year 4 $2,000
Average $4,250 $40,000
Average acctg return 10.6%

Cash Inflows capital outlay $ 25,000

for two possible
investments

Investment A Investment B
Year 1 $15,000 $5,000
Year 2 $8,000 $6,000
Year 3 $2,000 $7,000
Year 4 $6,000
Year 5 $5,000

Pay back
A $25,000 3 Years
B $24,000
$ 1,000
0.20
$25,000 4.2 Years

Initial Investment $ 12,000 $ 15,000

Investment A Investment B
Discount Rate 12% 12%
Initial Investment -$ 12,000 -$ 15,000
Year 1 $6,000 $9,000
Year 2 $5,000 $7,000
Year 3 $4,000 $3,000

NPV $ 190.23 $ 751.41

IRR 12.99% 15.44%
PI 1.0159 1.0501

$15,000 $19,000
112% 112% 12751.41
$1.405 $1.405 1.0626175
$ 10,677 $ 13,524
-$ 1,323 -$ 1,476

Summary Investment A Investment B Selection

NPV $ 190.23 $ 751.41 Higher NPV B
IRR 12.99% 15.44% Higher IRR B
PI 1.0159 1.0626 Higher profit B
30000
22500
15000
7500
75000 15000
Investment A Investment B
Probability of Probability of
Outcome Assumptions Outcome
outcome outcome
$250 0.25 Pessimistic $200 0.2
$650 0.5 Moderate $700 0.55
$800 0.25 Optimistic $850 0.25

Investment A Investment B
D P DP D P
$250 0.25 $62.50 $200 0.2
$650 0.5 $325.00 $700 0.55
$800 0.25 $200.00 $850 0.25
Expected value ∑ 𝐷𝑃 $587.50 Expected value ∑ 𝐷𝑃

Std Dev σ
Investment A
D D ̅ (D-D ̅ ) (D-D ̅ )^2 P (D-D ̅ )^2 P
$250 $587.50 -$337.50 113,906 0.25 $28,477
$650 $587.50 $62.50 3,906 0.5 $1,953
$800 $587.50 $212.50 45,156 0.25 $11,289
$41,719
Std Dev $204.25

Investment B
D D ̅ (D-D ̅ ) (D-D ̅ )^2 P (D-D ̅ )^2 P
$200 $637.50 -$437.50 191,406 0.2 $38,281
$700 $637.50 $62.50 3,906 0.55 $2,148
$850 $637.50 $212.50 45,156 0.25 $11,289
$51,719
Std Dev $227.42

Coeff of Var

(𝑉) = σ/𝐷 Coefficient of Variation

A 0.348
B 0.357
Assumptions
Pessimistic
Moderate
Optimistic

DP
$40.00
$385.00
$212.50
$637.50

$0.3477

$0.3567
You have been asked to evaluate several options in providing a new payment term system for the payables
department. You have been given the options below:

Discount period Number of discount perDiscount periods * discount rate = equivalent annualized
2/5, net 30 30-5=25 days 360 days/25 days=14.4 14.4x1%=28.8%
3/10, net 45 45-10=35 days 360/30=12 12x3%=36%
3/10, net 60 60-10=50 days 360/50=7.2 7.2x2%=21.6%
net 45 None None None

2 5 30 25 14.4 28.8%
3 10 45 35 10.29 30.9%
3 10 60 50 7.2 21.6%
r the payables

rate = equivalent annualized