Posted by Vanessa on Wednesday, January 4, 2012 at 2:52am.
a.Project A
Payback period
Year 1 + Year 2 + Year 3 = $60,000
Year 4 + $20,000
Initial investment = $80,000
Payback=3 years + ($20,000 / 30,000)
Payback =3.67 years
Project B
Payback period
$50,000/ $15,000 = 3.33 years
B.
Project A
CF0 = -$80,000; CF1= $15,000; CF2= $20,000; CF3= $25,000; CF4= $30,000;
CF5 =$35,000
Set I = 13%
Solve for NPVA = $3,659.68
Project B
CF0 =-$50,000; CF1 = $15,000; F1 = 5
Set I= 13%
Solve for NPVB = $2,758.47
c. Project A
CF0=-$80,000; CF1 = $15,000; CF2= $20,000; CF3= $25,000; CF4=$30,000;
CF5= $35,000
Solve for IRRA= 14.61%
Project B
CF0=$50,000; CF1= $15,000; F1=5
Solve for IRRB= 15.24%
D. It's a Graph. (You must Make It)
Data for NPV Profiles
NPV
Discount Rate A B
0% $45,000 $25,000
13% $3,655 2,755
14.6% 0 —
15.2% — 0
Intersection—approximately 14%
If cost of capital is above 14%, conflicting rankings occur.
The calculator solution is 13.87%.
E.
Both projects are acceptable. Both have similar payback periods, positive NPVs, and equivalent IRRs that are greater than the cost of capital. Although Project B has a slightly higher IRR, the rates are very close. Because Project A has a higher NPV, accept Project A.