Question

Q) A firm has a WACC of 9.60% and is deciding between two mutually exclusive projects. Project A has an initial investment of $60.12. The additional cash flows for project A are: year 1 = $19.64, year 2 = $35.94, year 3 = $43.15. Project B has an initial investment of $74.74. The cash flows for project B are: year 1 = $57.52, year 2 = $47.69, year 3 = $31.12. Calculate the Following:

-Payback Period for Project A:

-Payback Period for Project B:

-NPV for Project A:

-NPV for Project B:

Q2) Project Z has an initial investment of $62,309.00 . The project is expected to have cash inflows of $20,282.00 at the end of each year for the next 11.0 years. The corporation has a WACC of 12.35%. Calculate the NPV for project Z.

Answer 1

Q1)			Project A	Project B
	Payaback Period		2.11 Years	1.36 Years
	NPV		$ 20.49	$ 41.08
Working:
Project A
Year	Cash fows	Cumulative cash flows	Discount factor	Present Value
a	b	c	d=1.096^-a	b*d
0	$    -60.12	$                              -60.12	1.000	$             -60.12
1	19.64	-40.48	0.912	17.92
2	35.94	-4.54	0.832	29.92
3	43.15	38.61	0.760	32.78
		Total		20.49
		Payaback period	=	2+(4.54/43.15)
			=	2.11 Years
Project B
Year	Cash fows	Cumulative cash flows	Discount factor	Present Value
a	b	c	d=1.096^-a	b*d
0	$    -74.74	$                              -74.74	1.000	$             -74.74
1	57.52	-17.22	0.912	52.48
2	47.69	30.47	0.832	39.70
3	31.12	61.59	0.760	23.64
		Total		41.08
		Payaback period	=	1+(17.22/47.69)
			=	1.36 Years
Q2)
		NPV	$        56,299.33
	Working:
	a.	Present Value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
			=	(1-(1+0.1235)^-11)/0.1235		i	12.35%
			=	5.848		n	11
	b.	Present value of annual cash inflows		$      20,282.00	x	5.848	=	$ 1,18,608.33
		Less:Costs of Project						$     62,309.00
		NPV						$     56,299.33