Problem 8-21 NPV and Payback Period [LO 1, 4] Kaleb Konstruction, Inc., has the
ID: 2759463 • Letter: P
Question
Problem 8-21 NPV and Payback Period [LO 1, 4] Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 10 percent.
Calculate the payback period for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Calculate the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Year Project F Project G 0 –$ 135,000 –$ 205,000 1 60,000 40,000 2 50,000 55,000 3 60,000 90,000 4 55,000 120,000 5 50,000 135,000Explanation / Answer
a. Calculate the payback period for both projects:
Project F
Payback period = 2 years +[ ($135,000-$95,867.90) / $ 45,078.60]
= 2.86 years
Project G:
Year
Project (inflows)
PV factor @ 10%
PV cash flows
Cumulative
present value
1
$ 40,000
0.90909
$ 36,363.60
$ 36,363.60
2
$ 55,000
0.82645
$ 45,454.75
$ 81,818.35
3
$ 90,000
0.75131
$ 67,617.90
$ 1,49,436.25
4
$ 1,20,000
0.68301
$ 81,961.20
$ 2,31,397.45
5
$ 1,35,000
0.62092
$ 83,824.20
$ 3,15,221.65
Payback period = 3 years +[ ($205,000-$ 1,49,436.25) / $ 81,961.20]
= 3.68 years
Payback period
Project F
2.86 years
Project G
3.68 years
b. Calculate the NPV for both projects:
Year
Project (inflows)
PV factor @ 10%
PV cash flows
0
$ -1,35,000
1.00000
$ -1,35,000
1
$ 60,000
0.90909
$ 54,545.40
2
$ 50,000
0.82645
$ 41,322.50
3
$ 60,000
0.75131
$ 45,078.60
4
$ 55,000
0.68301
$ 37,565.55
5
$ 50,000
0.62092
$ 31,046.00
NPV
$ 74,558
Project G
Year
Project (inflows)
PV factor @ 10%
PV cash flows
0
$ -2,05,000
1.00000
$ -2,05,000
1
$ 40,000
0.90909
$ 36,363.60
2
$ 55,000
0.82645
$ 45,454.75
3
$ 90,000
0.75131
$ 67,617.90
4
$ 1,20,000
0.68301
$ 81,961.20
5
$ 1,35,000
0.62092
$ 83,824.20
NPV
$ 1,10,222
Net present value
Project F
$ 74,558
Project G
$ 110,222
C. It is advisable to select project G as it has higher NPV of $110,222.
Year
Project (inflows)
PV factor @ 10%
PV cash flows
Cumulative
present value
1
$ 40,000
0.90909
$ 36,363.60
$ 36,363.60
2
$ 55,000
0.82645
$ 45,454.75
$ 81,818.35
3
$ 90,000
0.75131
$ 67,617.90
$ 1,49,436.25
4
$ 1,20,000
0.68301
$ 81,961.20
$ 2,31,397.45
5
$ 1,35,000
0.62092
$ 83,824.20
$ 3,15,221.65