Calculate the payback period, IRR, MIRR, NPV, and PI for the following two mutually exclusive projects. The required rate of return is 15% and the target payback is 4 years. Explain which project is preferable under each of the four capital budgeting methods mentioned above:
Table 1
Cash flows for two mutually exclusive projects
Year Investment A Investment B
0 -$5,000,000 -5,000,000
1 $1,500,000 $1,250,000
2 $1,500,000 $1,250,000
3 $1,500,000 $1,250,000
4 $1,500,000 $1,250,000
5 $1,500,000 $1,250,000
6 $1,500,000 $1,250,000
7 $2,000,000 $1,250,000
8 0 $1,600,000
Sample Solution