c. Mangement is considering two hotel projects. Project A will be in Jamaica with an intial investment of $865,000 and Project B will be in Canada with an initial investment of $750,000.
The cost of capital for Project A is 13% and the cost of capital for project B is 15%.
Calculate the following;
a) Calculate the discounted payback period of Project A.(2 Marks)
b) Calculate the discounted payback period of Project B. (2 Marks)
c) Calculate the net present value for Project A. (2 Marks)
d) Calculate the net present value for Project B. (2 Marks)
e) Managemet can only accept one project. Which project should management accept?
A)
YEARS INITIAL DISCOUNTED PAYBACK PAYBACK
0 -865,000 1 -865,000
1 316,000 316,000/1.13^1= 279,646.01 -585353.99
2 350,000 350,000/1.13^2=274,101.34 -311,252.65
3 (20,000) (20,000/1.13^3=-13,861.00 -325,113.65
4 280,000 280,000/1.13^4= 171,729.24 153,384.41
To calculate the discounted payback period for each project, we need to determine the cash inflows and discount them using the respective cost of capital. The discounted payback period is the number of years it takes for the discounted cash inflows to equal or exceed the initial investment.
a) Calculate the discounted payback period of Project A:
- Initial Investment: $865,000
- Cost of capital: 13%
To calculate the discounted cash inflows, we need to know the cash inflows for each year of the project. Please provide the cash flows for each year for Project A.
b) Calculate the discounted payback period of Project B:
- Initial Investment: $750,000
- Cost of capital: 15%
Similar to Project A, we need to know the cash inflows for each year for Project B to calculate the discounted payback period.
c) Calculate the net present value for Project A:
- Initial Investment: $865,000
- Cost of capital: 13%
To calculate the net present value (NPV), we need to determine the cash inflows for each year and discount them to their present value using the cost of capital. Please provide the cash flows for each year for Project A.
d) Calculate the net present value for Project B:
- Initial Investment: $750,000
- Cost of capital: 15%
Similar to Project A, we need to know the cash inflows for each year for Project B to calculate the net present value.
e) To determine which project management should accept, compare the net present values (NPV) calculated for both projects. The project with the higher NPV is generally preferred as it represents a higher potential profitability.
To answer these questions, we first need to understand the concept of discounted payback period and net present value (NPV).
The discounted payback period is the time it takes for an investment to break even, considering the time value of money. It involves calculating the present value of expected cash flows and determining how long it takes for the cumulative present value to equal the initial investment.
Net present value (NPV) is a measure that calculates the value of an investment by discounting expected future cash flows to their present value, and then subtracting the initial investment.
Now let's calculate the answers to the given questions:
a) To calculate the discounted payback period of Project A, we need to calculate the discounted cash flows and find when the cumulative present value equals the initial investment. However, we need the expected cash flows for this calculation. If you can provide the expected cash flows over time for Project A, we can calculate the discounted payback period.
b) Similarly, to calculate the discounted payback period of Project B, we need the expected cash flows over time for Project B.
c) To calculate the net present value (NPV) for Project A, we need the expected cash flows over time for Project A and the cost of capital. If you can provide the expected cash flows and the time period for Project A, we can calculate the NPV using the formula:
NPV = (-Initial Investment) + (CF_1 / (1+r)^1) + (CF_2 / (1+r)^2) + ... + (CF_n / (1+r)^n)
Where CF is the expected cash flow for each period, r is the cost of capital, and n is the number of periods.
d) Similarly, to calculate the net present value (NPV) for Project B, we need the expected cash flows over time for Project B.
e) To determine which project management should accept, we compare the NPV values of both projects. If the NPV is positive, it means the project is expected to generate a return greater than the initial investment. In this case, management should accept the project with a higher NPV.
Please provide the expected cash flows over time for both Project A and Project B so that we can calculate the answers accordingly.