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Calculate the payback periods for both projects

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Question - H2O is considering the purchase of a large desalination system and wants you to conduct an analysis of its two possible systems, KK and GG.

The cash flows for each system are given in the table below:

System KK System GG

Initial cost (paid immediately) $400,000 $400,000

Net cash inflow for year 1 $225,000 $75,000

Net cash inflow for year 2 $265,000 $125,000

Net cash inflow for year 3 $175,000 $185,000

Net cash inflow for year 4 $65,000 $210,000

Assume all cash flows are received at the end of the relevant year. Both projects will have no salvage value after the 4th year. H2O uses a required rate of return of 8.5% for its projects.

Required -

(a) Calculate the Payback Periods (PP) for both projects.

(b) Calculate the Net Present Values (NPV) for both projects.

(c) Calculate the Profitability Index (PI) for both projects.

(d) Which project should be accepted and why?

Reference no: EM132994259

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