Question

Q) A firm has a WACC of 11.15% and is deciding between two mutually exclusive projects. Project A has an initial investment of $64.25. The additional cash flows for project A are: year 1 = $16.53, year 2 = $37.29, year 3 = $55.44. Project B has an initial investment of $74.76. The cash flows for project B are: year 1 = $58.16, year 2 = $37.08, year 3 = $20.71.

Calculate the Following:

-Payback Period for Project A:

-Payback Period for Project B:

-NPV for Project A:

-NPV for Project B:

Could you please show me a long format on how it is done (a more wrote out and traditional way)... for some reason I am looking at other examples and am not comprehending everything by what past people have taught.

Answer 1

Answer :

-Payback Period for Project A:  2.19 years

-Payback Period for Project B: 1.45 years

-NPV for Project A: $ 21.18

-NPV for Project B: $ 22.66

Notes:

Project A:

Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 2+(10.43/55.44)

= 2.19 years

Year	Investment	Cash Inflow	Net Cash Flow
0	-64.25	-	-64.25	(Investment + Cash Inflow)
1	-	16.53	-47.72	(Net Cash Flow + Cash Inflow)
2	-	37.29	-10.43	(Net Cash Flow + Cash Inflow)
3	-	55.44	45.01	(Net Cash Flow + Cash Inflow)

Project B:

Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 1+(16.60/37.08)

= 1.45 years

Year	Investment	Cash Inflow	Net Cash Flow
0	-74.76	-	-74.76	(Investment + Cash Inflow)
1	-	58.16	-16.60	(Net Cash Flow + Cash Inflow)
2	-	37.08	20.48	(Net Cash Flow + Cash Inflow)
3	-	20.71	41.19	(Net Cash Flow + Cash Inflow)

Project A:

Net present Value = Present Value of Cash Inflows - Present Value of Cash Outflows

= [ 16.53*1/(1.1115)^1+37.29*1/(1.1115)^2+55.44*1/(1.1115)^3]-64.25

= $ 21.18

Project B:

Net present Value = Present Value of Cash Inflows - Present Value of Cash Outflows

= [ 58.16*1/(1.1115)^1+37.08*1/(1.1115)^2+20.71*1/(1.1115)^3]-74.76

= $ 22.66