All techniques, conflicting rankings Please show work. All techniques, conflicti

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All techniques, conflicting rankings

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All techniques, conflicting rankings Nicholson Roofing Materials, Inc., is considering two mutually exclusive projects, each with an initial investment of $200,000. The company's board of directors has set a 4-year payback requirement and has set its cost of capital at 7%. The cash inflows associated with the two projects are shown in the following table: Calculate the pay back period for each project. Rank the projects by payback period. , Calculate the NPV of each project. Rank the project by NPV. Calculate the IRR of each project. Rank the project by ERR. Make a recommendation. The payback period of project A is

Explanation / Answer

From the above table, we can se that the initial investment in Project A is recovered after the 3rd year.

Payback period is calculated as

Number of years of full recovery + (Unrecovered balane at the last year / Cash flow for the lasst year)

3+(20000/60000) = 3.33 years

The payback period for Project B = 3 + (25000/50000) = 3.5years

Calculation of IRR

IRR = A + C/(C-D) * (B-A)

A = Lower discount rate = 19%

B = Higher discount rate = 20%

C = NPV from lower discount rate = $4318.70

D = NPV from higher discount rate = $-469.39

IRR = 19 + ((4318.70/(4318.70--469.39)) * (20-19)

IRR = 19.90%

IRR for Project B considering the above formula =

17 + ((826.76/(826.76--3933.43)) * (18-17)

= 17.17%

From the above calculations, the payback and NPV for Project A seems to be good when compared to Project B

Year Project A cashflow Cumulative Cash flow Pv factor @ 7% PV of cash flows 0 -200000 -200000 1 -200000 1 60000 -140000 0.934579439 56074.76636 2 60000 -80000 0.873438728 52406.3237 3 60000 -20000 0.816297877 48977.87261 4 60000 40000 0.762895212 45773.71272 5 60000 100000 0.712986179 42779.17077 6 60000 160000 0.666342224 39980.53343 NPV 85992.37959

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