Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash
ID: 2759827 • Letter: C
Question
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$ 350,000 –$ 50,000 1 45,000 24,000 2 65,000 22,000 3 65,000 19,500 4 440,000 14,600 Whichever project you choose, if any, you require a 15 percent return on your investment. a-2 If you apply the payback criterion, which investment will you choose? Project A Project B b-1 What is the discounted payback period for each project? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Project 1 Year 0 Year 1 Year 2 Year 3 Year 4 Cash outlflow -350,000 Cash Inflow - 45,000 65,000 65,000 440,000 Cash Inflow -Net -350,000 45,000 65,000 65,000 440,000 Discount rate @ 9% 1.000 0.870 0.756 0.658 0.572 PV of Cash Inflow -350,000 39,130 49,149 42,739 251,571 Cummulative Cash inflow -350,000 -310,870 -261,720 -218,982 32,590 Payback Period of Project 1 4 years - 32590/251571 i.e 4- 0.13 = 3.87 Years Project 2 Year 0 Year 1 Year 2 Year 3 Year 4 Cash outlflow -50,000 Cash Inflow - 24,000 22,000 19,500 14,600 Cash Inflow -Net -50,000 24,000 22,000 19,500 14,600 Discount rate @ 9% 1.000 0.870 0.756 0.658 0.572 PV of Cash Inflow -50,000 20,870 16,635 12,822 8,348 Cummulative Cash inflow -50,000 -29,130 -12,495 326 8,674 Payback Period of Project 2 3 years - 326/12822 i.e 3- 0.03 = 2.97 Years In our opinion Project 2 have a better payback period in comparison of Project 1.