All techniques, conflicting rankings Nicholson Roofing Materials, Inc., is consi
ID: 2476460 • Letter: A
Question
All techniques, conflicting rankings Nicholson Roofing Materials, Inc., is considering
two mutually exclusive projects, each with an initial investment of $150,000.
The company’s board of directors has set a maximum 4-year payback requirement
and has set its cost of capital at 9%. The cash inflows associated with the two projects
are shown in the following table
Cash inflows (CFt)
Year Project A Project B
1 $45,000 $75,000
2 45,000 60,000
3 45,000 30,000
4 45,000 30,000
5 45,000 30,000
6 45,000 30,000
a. Calculate the payback period for each project.
b. Calculate the NPV of each project at 0%.
c. Calculate the NPV of each project at 9%.
d. Derive the IRR of each project.
e. Rank the projects by each of the techniques used. Make and justify a recommendation.
f. Go back one more time and calculate the NPV of each project using a cost of
capital of 12%. Does the ranking of the two projects change compared to your
answer in part e? Why?
Explanation / Answer
a. Payback Period
Payback Period:
Project A = 3 years + [150000-135000]/[225000-180000]
= 3.33 years
Project B = 2 years + [150000-135000]/[165000-135000]
= 2.5 years
b. NPV @ 0%
c. NPV @ 9%
Year Cash Flows (A) Cumulative Cash Flows (B) Cumulative 1 45000 45000 75000 75000 2 45000 90000 60000 135000 3 45000 135000 30000 165000 4 45000 180000 30000 195000 5 45000 225000 30000 225000 6 45000 270000 30000 255000