Question

Now the president is starting to get on your nerves. But, whaddayagonnado? He is the president. You just wish he wasn’t so demanding. Nevertheless, you press on. He has informed you that you need to aid in a decision regarding a new facility. There are 3 mutually exclusive locations being considered each with it’s own startup cost and projected cash flows as shown below:

	Timbuktu	Neverland	Middle Earth
Cost	$3,600	$8,750	$6,500
Year 1 CF	$0	$4,000	$2,000
Year 2 CF	0	4,000	2,000
Year 3 CF	0	1,500	2,000
Year 4 CF	0	0	2,000
Year 5 CF	$8,500	3,000	3,000

The president has asked for a thorough analysis. Keeping in mind DWOTT’s cost of capital (use WACC above)(8.42%), what decision should be made regarding the projects above using each of the following tools:

What is each project's payback period and which would you choose?

Timbuktu:

Neverland:

Middle Earth:

Choice & Why?

What is each project's discounted payback period and which would you choose?

Timbuktu:

Neverland:

Middle Earth:

Choice & Why?

What is each project's net present value and which would you choose?

Timbuktu:

Neverland:

Middle Earth:

Choice & Why?

What is each project's internal rate of return and which would you choose?

Timbuktu:

Neverland:

Middle Earth:

Choice & Why?

What is each project’s modified internal rate of return and which would you choose?

Timbuktu:

Neverland:

Middle Earth:

Choice & Why?  

Considering the WACC and given the calculations above, which project do you prefer, and why?

Answer 1

project pay back period.

	Timbuktu	Neverland	Middle earth
cost	3600	8750	6500
Cash inflows
year1	0	4000	2000
year2	0	4000	2000
year3	0	1500	2000
year4	0	0	2000
year5	8500	3000	3000
total inflows	8500	12500	11000
avg inflows per annum (total/5)	1700	2500	2200
Payback period (cost/avg inflows)	2.11	3.5	2.95

I would choose neverland.

discounted payback period..

given cost of capital is 8.42%

	timbuktu	neverland	middleeartj
cost	3600	8750	6500
inflows@discounted value
year1	0	4000*.9223=3689.3 (.9223=100/100+8.42)	2000*.9223=1844.6
year2	0	4000*.8589=3435.8 .(8589=100/100+8.42*2)	2000*.8589=1705.8
year 3	0	1500*7847=1176.9	2000*.7846=1569.2
year4	0	0	2000*7237=1447.41
year5	8500*.6675=5673.77	3000*.6675=2002.5	3000*.6675=2002.5
total pv of inflows	5683.77	10304.5	8569.51
average of inflows	1136.74	2060.9	1713.9
payback period	3600/1136.74=3.16	4.2	3.79

suggested is neverland.

Total NPV of each project is pv of outflows minus pv of inflows.

a. Timbuktu; 5683.77-3600= 2083.77

b.Neverland; 10304.5- 8750 = 1554.5

c.middle earth; 8569.51- 6500= 2069.51

NPV is high in Timbuktu.

considering NPV as the deciding factor for choosing projects I would rank prajects as follows;

Timbuktu. 1

Middle earth. 2

Neverland. 3