Question
In: Finance
As director of capital budgeting, you are reviewing three potential investment projects with the following cost...
As director of capital budgeting, you are reviewing three potential investment projects with the following cost and cash flow projections.
|
Cash Flow |
Project A |
Project B |
Project C |
|
Investment Cost |
($400,000) |
($375,000) |
($400,000) |
|
Year One Cash Flow |
$200,000 |
$75,000 |
$50,000 |
|
Year Two Cash Flow |
$50,000 |
$75,000 |
$120,000 |
|
Year Three Cash Flow |
$75,000 |
$85,000 |
$140,000 |
|
Year Four Cash Flow |
$50,000 |
$225,000 |
$125,000 |
|
Year Five Cash Flow |
$125,000 |
$60,000 |
$125,000 |
1.Calculate the Payback Period for each project.
2.If the discount rate for all three projects is 10.5%, calculate the Net Present Value for each project.
Solutions
Expert Solution
Using excel formula to calculate payback period and NPV
| A | B | C | D | E | F | ||
| Cash Flow | Investment Cost | Year One Cash Flow | Year Two Cash Flow | Year Three Cash Flow | Year Four Cash Flow | Year Five Cash Flow | |
| 1 | Project A | -$400,000.00 | $200,000.00 | $50,000.00 | $75,000.00 | $50,000.00 | $125,000.00 |
| 2 | Cumulative Cash Flow | -$400,000.00 | -$200,000.00 | -$150,000.00 | -$75,000.00 | -$25,000.00 | $100,000.00 |
| 3 | Payback period | $4.20 | (=4+25000/125000) | ||||
| 4 | NPV | -$13,056.44 | Excel Formula=NPV(10.5%,B1:F1)+A1 | ||||
| 5 | Project B | -$375,000.00 | $75,000.00 | $75,000.00 | $85,000.00 | $225,000.00 | $60,000.00 |
| 6 | Cumulative Cash Flow | -$375,000.00 | -$300,000.00 | -$225,000.00 | -$140,000.00 | $85,000.00 | $145,000.00 |
| 7 | Payback period | $3.62 | (=3+140000/225000) | ||||
| 8 | NPV | $4,631.22 | Excel Formula=NPV(10.5%,B5:F5)+A5 | ||||
| 9 | Project C | -$400,000.00 | $50,000.00 | $120,000.00 | $140,000.00 | $125,000.00 | $125,000.00 |
| 10 | Cumulative Cash Flow | -$400,000.00 | -$350,000.00 | -$230,000.00 | -$90,000.00 | $35,000.00 | $160,000.00 |
| 11 | Payback period | $3.72 | Excel Formula=NPV(10.5%,B5:F5)+A5 | ||||
| 12 | NPV | $7,006.49 | Excel Formula=NPV(10.5%,B1:F1)+A1 |
jeff jeffy answered 3 months agoRelated Solutions
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