Consider the following mutually exclusive pieces of equipment that perform the s
ID: 2789628 • Letter: C
Question
Consider the following mutually exclusive pieces of equipment that perform the same task. The two alternatives available provide the following set of after-tax net cash flows:
Year Cash Flow(A) Cash Flow(B)
0 -120,000 -120,000
1 23,000 25,000
2 23,000 25,000
3 23,000 25,000
4 32,000 25,000
5 32,000 25,000
6 32,000 25,000
7 25,000
8 25,000
9 25,000
Equipment A has an expected life of three years, whereas equipment B has an expected life of nine years. Assume a required rate of return of 7 percent.
a. Calculate each equipment’s payback period.
b. Calculate each equipment’s discounted payback period.
c. Calculate each equipment’s Net Present Value (NPV).
d. calculate each equipment’s internal rate of return.
Explanation / Answer
a. Payback period
Project A
Payback period = 4 + $19000 / $32000
= 4.59 years
Project B
Payback period = 4 + $20000 / $25000
= 4.8 years.
b. Discounted payback period
Project A:
Discounted payback period = 5 + $12503 / $21312
= 5.58 years
Project B:
Discounted payback period = 6 + $925 / $15550
= 6.05 years.
Year Project A Cummulative cash flows Project B Cummulative cash flows 1 $23000 $23000 $25000 $25000 2 $23000 $46000 $25000 $50000 3 $23000 $69000 $25000 $75000 4 $32000 $101000 $25000 $100000 5 $32000 $133000 $25000 $125000 6 $32000 $165000 $25000 $150000 7 $25000 $175000 8 $25000 $200000 9 $25000 $225000