Bobby is currently the senior analyst of Black & Black Co. He is evaluating 2 pr
ID: 2634626 • Letter: B
Question
Bobby is currently the senior analyst of Black & Black Co. He is evaluating 2 projects for potential investments. Project A has cash flows of $500,000 in year 1, 2,500,000 in the next 2 years and in year 4, the liquidation value of the assets is $750,000. Project B will provide cash flows of $1,100,000 for the next 2 years, and the assets will have liquidation value of $300,000 at the end of 3 years. Both projects cost $2,000,000 and both projects should be discointed at 10%.
What is the payback period for these two investments? Considering payback period only, which of these two investments should be chosen?
What is the NPV of the two projects? Considering NPV only, which of the two investments should be chosen?
Explanation / Answer
Based on NPV project 1 has can be chosen.
Payback period wise, project 1 makes more sense..
NPV 1 2 3 4 Project 1 4911208 454545.5 2066116 1878287 512260.1 Project 2 2134485 1000000 909090.9 225394.4