Question

Tri Star, Inc., has the following mutually exclusive projects:

Year	Project A				Project B
0	–$	15,000			–$	10,300
1		9,500				5,000
2		8,100				4,500
3		2,100				6,900

Calculate the payback period for each project. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

	Payback Period
Project A	___ years
Project B	___ years

Based on the payback period, which project should the company accept?

Project B or A?

• Project B

• Project A

If the appropriate discount rate is 14 percent, what is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

	NPV
Project A	$ ___
Project B	$ ___

Based on the NPV, which project should the company accept?

Project A or B?

• Project A

• Project B

Answer 1

Year	Project A		Project B
	Cash flows	Cumulative cash flows	Cash flows	Cumulative cash flows
0	-15000	-15000	-10300	-10300
1	9500	-5500	5000	-5300
2	8100	2600	4500	-800
3	2100	4700	6900	6100
Project A Pay back period = 1 + (5,500/8,100) = 1.68 years
Project B Pay back period = 2 + (800/6900) = 2.12 years
Project A can be accepted because payback period is 1.68 Years which is shorter payback period than Project B.
Year	Discount Factor @14%	Project A		Project B
		Cash flows	Discounted cash flows	Cash flows	Discounted cash flows
0	1.000000	-15000	-15000.00	-10300	-10300.00
1	0.877193	9500	8333.33	5000	4385.97
2	0.769468	8100	6232.69	4500	3462.61
3	0.674972	2100	1417.44	6900	4657.31
NPV			983.47		2205.88
Project B can be accepted because NPV is $2,205.88 which is higher than the Project A