Question

Wynn Resorts Inc. has money available for investment and is considering two projects each costing $17,500. Each project has a useful life of 3 years and no salvage value. The investment cash flows follow:

               Project A      Project B

Year 1          $ 2,000         $7,000

Year 2             7,000          7,000

Year 3            10,000         7,000

Instructions

1. Calculate the cash payback for each project.

2. Using the net present value method (hint: use discount factors), compute the net present value for each project if 6% is an acceptable earnings rate. (Use tables from Appendix G.)

3. Which project should be selected? Explain your answer.

Answer 1

Ans:

a)

Project A:

Initial investment of $9,000 will be recovered in first 2 years and remaining $8,500 in 3^rd year.

Payback Period = 2 + $8,500/$10,000
Payback Period = 2.85 years

Project B:

Initial investment of $14,000 will be recovered in first 2 years and remaining $3,500 in 3^rd year.

Payback Period = 2 + $3,500/$7,000
Payback Period = 2.50 years

b) ans:

Project A
Year	Cash Flow (A)	Discounting Factor @6% (B)	Present Value Cash flow (A * B)
0	-17500	1	(17,500)
1	2000	0.943	1,886
2	6000	0.890	5,340
3	13000	0.840	10,920
		NPV	646
Project B
Year	Cash Flow (A)	Discounting Factor @6% (B)	Present Value Cash flow (A * B)
0	-17500	1	(17,500)
1	7000	0.943	6601
2	7000	0.890	6230
3	7000	0.840	5880
		NPV	1211

C.Ans :Project B should be selected

As Pay back period is also early and have more net present value than Project A