Question

A firm has a WACC of 11% and is deciding between two mutually exclusive projects. Project A has an initial investment of $61. The additional cash flows for project A are: year 1 = $15, year 2 = $37, year 3 = $67. Project B has an initial investment of $73.The cash flows for project B are: year 1 = $56, year 2 = $42, year 3 = $21. Calculate the payback and NPV for each project. (Show all answers to 2 decimals)

Answer 1

PAYBACK PERIOD:

PROJECT A
Year	CASH FLOWS	CUMULATIVE RETURN PROJECT A
0	-63	-63
1	17	-46
2	37	-9
3	61	52
TOTAL	52
	Payback Period =	2 YEARS + 9/61
		2.15 YEARS

PROJECT B
Year	CASH FLOWS	CUMULATIVE RETURN PROJECT B
0	-73	-73
1	58	-15
2	41	26
3	37	63
TOTAL	63
	Payback Period =	1 YEAR + 15/41
		1.37 YEARS

NPV: