Question

GIVING THIS DATA, please answer 1 and 2 Questions;

Project A payback period = 100,000/25,000 = 4 Years

Project B payback period = 100,000/20,000 = 5 Years

1- go back to short answer above, and using that data calculate NPV for projects A and B using a 10% discount rate.

2-In number 1 above, which project do you pick if they are mutually exclusive? Which do you pick if they are independent and the company has enough funds to do all projects?

Answer 1

Answer :-

1. As given, to take data from above payback period calculation. The period of project is taken as payback period time.

For Project A :-

Year 0 :- Cash outflow of 100,000

Year 1 to 4 :- Cash Inflow of 25,000 each year

NPV = PV of Cash Inflow - Cash Outflow

= [ 25,000 * PVAF@10% for 4 years ] - Cash Outflow

= [ 25,000 * 3.169865 ] - 100,000

= 79,246.63 - 100,000

= (-20,753.37)

For Project B :-

Year 0 :- Cash outflow of 100,000

Year 1 to 4 :- Cash Inflow of 20,000 each year

NPV = PV of Cash Inflow - Cash Outflow

= [ 20,000 * PVAF@10% for 5 years ] - Cash Outflow

= [ 20,000 * 3.790787 ] - 100,000

= 75,815.74 - 100,000

= (-24,184.26)

2. Both the Project A & B will be rejected as both have negative NPV.