1. Lobers, Inc.

, has two investment proposals, which have the following characteristics: (See below)

For each project, compute its payback period, its net present value, and its profitability This Model is prepared by Rajib Dahal. If you need excelsheet
index using a discount rate of 15 percent. calculation, please contact me at my email at
rajib.dahal@nu.edu.kz/rajib.dahal@gmail.com

© Rajib Dahal
Project A Project B Discount Factor DCF
PERIOD Cost Profit After Taxes Net Cash flow Discount Factor DCF Cost Profit After Taxes Net Cash flow
0 9,000.00 1.00 9,000.00 12,000.00 1.00 12,000.00
1 1,000.00 5,000.00 0.87 4,347.83 1,000.00 5,000.00 0.87 4,347.83
2 1,000.00 4,000.00 0.76 3,024.57 1,000.00 5,000.00 0.76 3,780.72
3 1,000.00 3,000.00 0.66 1,972.55 4,000.00 8,000.00 0.66 5,260.13
NPV for Project A 344.95 NPV for Project B 1,388.67
Payback Period for Project A: 2 years
Payback Period for Project B: 2.25 years
Profitability Index for Project A 1.04
Profitability Index for Project B 1.12

2. In Problem 1, what criticisms may be offered against the payback method?

The payback period computation does not take into account the time value of money, and terminal cash flows (cashflows occuring after payback period).