Question

The firm must choose between two mutually exclusive investments each requiring initial outlay of $8000 with...

  1. The firm must choose between two mutually exclusive investments each requiring initial outlay of $8000 with the following net cash flows:

Year Investment A Investment B

1 3200 4800

2 2400 3200

3 4800 2400

The firm’s required rate of return is 14%

  1. Calculate the payback period and the net present value method for each investment.

  2. Which (or both) investment should be chosen?

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Homework Answers

Answer #1

Using Excel to calculate payback period.

Year 0 1 2 3
Cash Flow -8000 3200 2400 4800
Cumulative Cash Flow -8000 -4800 -2400 2400
Payback Period 2.5 (PB=2+2400/4800)
Year 0 1 2 3
Cash Flow -8000 4800 3200 2400
Cumulative Cash Flow -8000 -3200 0 2400
Payback Period 2 PB= 2
A B
0 -8000 -8000
1 3200 4800
2 2400 3200
3 4800 2400
NPV -106.40 292.75
Excel Formula NPV(14%,A1:A3)+A0 NPV(14%,B1:B3)+B0

Since NPV of Project B is higher it should be accepted

Please Discuss in case of Doubt

Best of Luck. God Bless
Please Rate Well

Please Discuss in case of Doubt

Best of Luck. God Bless
Please Rate Well

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