Profitability Index basis and a Payback Period basis

Calculate the NPV, Profitability Index, and Payback Period for the following mutually exclusive projects.
5-year project; a cost of $15,000; returns of $4,000 at the end of the first year; returns then increase by $1,000 annually.
5-year project; a cost of $15,000; returns of $13,000 at the end of the first year; returns of $2000 per year for each year after the first year.
The firm uses a 10% discount rate.

Which project would you choose on an NPV basis, a Profitability Index basis, and a Payback Period basis?

Sample Solution

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