Problem 7-1 Calculating Payback Period and NPV Tri Star, Inc., has the following
ID: 2826231 • Letter: P
Question
Problem 7-1 Calculating Payback Period and NPV
Tri Star, Inc., has the following mutually exclusive projects:
Calculate the payback period for each project. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Based on the payback period, which project should the company accept?
Project B
Project A
If the appropriate discount rate is 14 percent, what is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Based on the NPV, which project should the company accept?
Project B
Project A
Year Project A Project B 0 –$ 14,200 –$ 9,600 1 8,800 4,300 2 7,400 3,800 3 2,100 6,200Explanation / Answer
Calculation of PAYBACK PERIOD
Payback period is nothing but time required to recover the initial cost.
PROJECT A
Payback period =1 year + (14200-8800)/7400
=1.73 years
PROJECT B
Payback period =2 years +(9600-4300-3800)/6200
=2.24
IN TERMS OF PAYBACK PERIOD , PROJECT A IS RECOMMENDABLE SINCE IT IS HAVING LESS PAYBACK PERIOD
Calculation of NPV
PROJECT A
NPV= Present value of cash flows – Initial investment
=[8800*PVF@14%,Year1]+[7400*PVF@14%,Year2]+[2100*PVF@14%,Year3] – 14200
=7719+5694+1418-14200
=$631
PROJECT B
NPV=[4300*PVF@14%Year1 ]+[3800*PVF@14%Year2]+[6200*PVF@14%Year3] -9600
=3772+2924+4185-9600
=$1281
IN TERMS OF NPV,PROJECT B IS RECOMMENDABLE SINCE IT HAVING HIGHER NPV