Jamie Dermott: Mutually Exclusive Project Analysis

Jamie Dermott: Mutually Exclusive Project Analysis

Prepared by:

Shoumik IslamID: 1130409030

Kazi Mehdi RahmanID: 1210910030

Nowshadur RahmanID: 1130111030

Rehnuma IslamID: 1210996030

Prepared for:

Adnan Habib (Anb)

FIN440.1

Summer 2014

North South University

Answer to Question 1

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%

Answer to Question 2

In the case of the projects being independent:

Based on cutoff date, which required a payback period of no more than three years, project B should be accepted, as its payback period is lower than 3 years and project A should be rejected, as its payback period exceeds 3 years.

Based on NPV, both projects should be accepted, as both projects have positive NPVs.

Based on IRR, both projects should be accepted, as both projects have IRRs that exceed the firm’s discount rate (i.e. 12%).

Constraints that may make the projects mutually exclusive rather than independent are:

1. Budget or financial contraints – the company may not have enough money to finance both projects.

2. Homogeneous products for both projects – if the products added to the Avalon product line by both the projects are very similar, then an increase in the sale of the product from one project would decrease the sale of the product from the other project, making it useless to have both.

3. Time and...