Problem 7-1 Calculating Payback Period and NPV Tri Star, Inc., has the following
ID: 2658432 • Letter: P
Question
Problem 7-1 Calculating Payback Period and NPV Tri Star, Inc., has the following mutually exclusive projects earproject A Project 0 $13,600 $9,000 1 8,200 3,700 2 6,8003,200 3 2,100 5, 600 ped ook Calculate the payback period for each project. (Do not round interme erences lplaces, e.g., 32.16.) Payback Period Project years Project Based on the payback period, which project should the company accep O Project A O Project B If the appropriate discount rate is 15 percent, what is the NPV for each pre your answers to 2 decimal places, e.g., 32.16.) NPV Project A. Project
Explanation / Answer
1)
PROJECT A:
Cumulative cash flow for year 0 = -13600
Cumulative cash flow for year 1 = -13600 + 8200 = -5400
Cumulative cash flow for year 2 = -5400 + 6800 = 1,400
5400 / 6800 = 0.79
Payback period fpr project A = 1 + 0.79 = 1.79 years
PROJECT B:
Cumulative cash flow for year 0 = -9000
Cumulative cash flow for year 1 = -9000 + 3700 = -5300
Cumulative cash flow for year 2 = -5300 + 3200 = -2100
Cumulative cash flow for year 3 = -2100 + 5600 = 3500
2100 / 5600 = 0.375
Payback period for project B = 2 + 0.38 = 2.38 years
We will accept project A as it has a lower payback period.
2)
PROJECT A:
NPV = Present value of cash inflows - present value of cash outflows
NPV = -13600 + 8200 / ( 1 + 0.15)1 + 6800 / ( 1 + 0.15)2 + 2100 / ( 1 + 0.15)3
NPV = -13600 + 7130.4348 + 5141.7769 + 1380.7841
NPV = 52.99 or $53
PROJECT B:
NPV = Present value of cash inflows - present value of cash outflows
NPV = -9000 + 3700 / ( 1 + 0.15)1 + 3200 / ( 1 + 0.15)2 + 5600 / ( 1 + 0.15)3
NPV = -9000 + 3217.3913 + 2419.6597 + 3682.0909
NPV = 319.14
Based on NPV, Project B should be accepted as it has a higher NPV.