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Calculation Of NPV IRR And PI For Two Mutually Exclusive Projects

Question

Bernie’s Restaurants is considering two mutually exclusive projects having the cash flow streams shown in the table below.

a. Compute the net present value (NPV) for both projects using a 15% required rate of return.

b. Compute the internal rate of return (IRR) for both projects.

c. Compute the profitability index for both projects.

d. Which project should Bernie’s business accept and why?

Bernie’s Restaurants Capital Budgeting Projects

Year

Project A Net Cash Flow

Project B Net Cash Flow

0

– $90,000

–$100,000

1

$40,000

$30,000

2

$40,000

$50,000

3

$40,000

$25,000

4

$40,000

$55,000

 

Summary

The question belongs to Finance and it discusses about a scenario of a chain of restaurants which is considering to mutually exclusive projects with cash flows given. The net present value (NPV), internal rate of return (IRR), profitability index (PI), etc need to be calculated and the best project needs to be ascertained. This has been given in the solution.

Total Word Count 238

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Comments

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