Question

A firm has a WACC of 10.73% and is deciding between two mutually exclusive projects. Project A has an initial investment of $60.37. The additional cash flows for project A are: year 1 = $16.93, year 2 = $36.08, year 3 = $66.38. Project B has an initial investment of $71.10. The cash flows for project B are: year 1 = $58.77, year 2 = $41.33, year 3 = $28.93. Calculate the Following:

a) Payback Period for Project A:

b) Payback Period for Project B:

c) NPV for Project A:

d) NPV for Project B:

Answer 1

Computation of Payback Period
(a) Project A				(b) Project B
Year	Cashflows	Cummulative Cashflows		Year	Cashflows	Cummulative Cashflows
0	$      (60.37)			0	$     (71.10)
1	$         16.93	$             16.93		1	$       58.77	$            58.77
2	$         36.08	$             53.01		2	$       41.33	$          100.10
3	$         66.38	$          119.39		3	$       28.93	$          129.03
Payback Period = 2 years+ {(60.37 - 53.01) / 36.08}				Payback Period = 1 year+ {(71.10-58.77) / 41.33}
Payback Period = 2.204 years				Payback Period = 1.702 years

	Computation of NPV
	Required Return = 10.73 %
(c)	Project A				(d)	Project B
	Year	Cashflows	PVF at 10.73%	PV		Year	Cashflows	PVF at 10.73%	PV
A	0	$     (60.37)	1.0000	$    (60.37)		0	$     (71.10)	1.0000	$   (71.10)
		PV of Cash Outflows		$    (60.37)			PV of Cash Outflows		$   (71.10)
B	1	$        16.93	0.9031	$       15.29		1	$        58.77	0.9031	$     53.08
	2	$        36.08	0.8156	$       29.43		2	$        41.33	0.8156	$     33.71
	3	$        66.38	0.7366	$       48.89		3	$        28.93	0.7366	$     21.31
		PV of Cash Inflows		$       93.61			PV of Cash Inflows		$   108.09
C	NPV	= B-A		$       33.24		NPV	= B-A		$     36.99