Question
In: Finance
Calculate the Net Present Value given two proposed projects of AIM Manufacturing Corp. Project # 1:...
Calculate the Net Present Value given two proposed projects of AIM Manufacturing Corp.
Project # 1:
Initial Investment: $100,000
Cash Inflows:
Year 1: $45,000
Year 2: $48,000
Year 3: $55,000
Year 4: $75,000
Year 5: $150,000
Project # 2:
Initial Investment: $100,000
Cash Inflows:
Year 1: $65,000
Year 2: $45,000
Year 3: $25,000
Year 4: $10,000
Year 5: $1,000
What are the Payback Period for each project using the NPV Method? Which project would you select in you were looking for higher cash inflows in your capital budget? Why....
Solutions
Expert Solution
NPV is calculated below-
| Project 1 | |||
| Year | Cash flow | 8% Discounted factor | Discounted cash flows |
| 1 | 45000 | 0.926 | 41666.67 |
| 2 | 48000 | 0.857 | 41152.26 |
| 3 | 55000 | 0.794 | 43660.77 |
| 4 | 75000 | 0.735 | 55127.24 |
| 5 | 150000 | 0.681 | 102087.48 |
| 181606.94 | |||
| Initial Investment | 100000 | ||
| NPV | 81606.94 | ||
| Project 2 | |||
| Year | Cash flow | 8% Discounted factor | Discounted cash flows |
| 1 | 65000 | 0.926 | 60185.19 |
| 2 | 45000 | 0.857 | 38580.25 |
| 3 | 25000 | 0.794 | 19845.81 |
| 4 | 10000 | 0.735 | 7350.30 |
| 5 | 1000 | 0.681 | 680.58 |
| 125961.54 | |||
| Initial Investment | 100000 | ||
| NPV | 25961.54 | ||
Thus, NPV of Project 1 is higher which should be selected.
Payback Period
A + B/C
Formula- Period with negative cumulative cash flow+ Absolute value of cash flow at end of period A/ Total cash inflow during A
| Project 1 | ||
| Year | Cash flow | Cumulative |
| 0 | -100000 | -100000 |
| 1 | 45000 | -55000 |
| 2 | 48000 | -7000 |
| 3 | 55000 | 48000 |
| 4 | 75000 | 123000 |
| 5 | 150000 | 273000 |
| Payback Period | 2.13 | |
| Project 2 | ||
| Year | Cash flow | Cumulative |
| 0 | -100000 | -100000 |
| 1 | 65000 | -35000 |
| 2 | 45000 | 10000 |
| 3 | 25000 | 35000 |
| 4 | 10000 | 45000 |
| 5 | 1000 | 46000 |
| Payback Period | 1.78 | |
Thus, payback period of project 2 is accepted. However, by looking at NPV, it can be said that Project 1 should be selected because over the time, investment made will yield higher returns than Project 2.
jeff jeffy answered 7 months agoRelated Solutions
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