Question

Detweiler's Farm Market has recently decided to open a new Housewares section in their market. There are two potential plans they can choose from based on the cash-flow projections below. Both projects must be paid back over 30 months.

1. Based on a payback analysis, should which project should you accept?

2. If your cost of capital is 5%, what would be your choice on a Net Present value analysis. Please show work.

Year	Project A	Project B
0	-72,000	-81,000
1	21,400	21,100
2	22,900	22,200
3	56,300	74,800

Answer 1

Project A

Pay Back Period = 2 years + ( 27700 / 56300)

                                 =2.49 years.

NPV = (21400 * 0.9524) + ( 22900 * 0.9070) + ( 56300 * 0.8638) – 72000

       = 89783.6 – 72000

          = 17783.60

Project B

Pay Back Period = 2 years + (37700 / 74800)

                                 =2.50 years.

NPV = (21100 * 0.9524) + ( 22200 * 0.9070) + ( 74800 * 0.8638) – 81000

       = 104843.28 – 81000

          = 23843.28

As per Pay back period, Project A should be accepted.

As per NPV, Project B should be accepted.