Question

Use the following information to answer the next three questions. A business technology corporation is considering two mutually exclusive labor-saving automation initiatives for its existing operations:

Project	Initial Cost	Return (Year 1)	Return (Year 2)
Automate	$950	$1050	$0
Blockchain	$850	$500	$475

1. If the relevant discount rate is 5%, calculate the NPV of each project

1. Calculate the IRR of each project

1. Define the payback period method and how it might influence your decision between the choice of Project Automate and Blockchain

1. List and describe the three major uses of cash flow from a firm once suppliers and employees have been paid

Answer 1

NPV of Project =PV of Cash flows -Initial Investment
NPV of Automate =1050/(1+5%)-950 =50
NPV of Block chain =500/(1+5%)+475/(1+5%)^2-850 =57.03

IRR of automate =(1050/950)-1 =10.53%
IRR of block chain using financial calculator
CF0=-850;CF1=500;CF2=475;CPT IRR =9.74%

Payback period is the period when the company is breakeven that is teh company recovers its costs. It doesnot use time value of money. Based on payback period Automate recovers in 1 year wheras Block chain has pay back period greater than 1. Hence automate would have been selected.

Three major uses of cash flow
1. Interest payments
2. Investments in working capital
3. investment in fixed assets or capital expenditure