Question

(a) If management requires projects to have a 3-year payback, would it accept either of the following two independent projects? Please explain thoroughly the calculations of payback period, by showing precise years of payback. Please show formulas in your calculations. Please do not use excel.

(b) What is the NPV of project B assuming the discount rate is 14%. Please explain thoroughly your calculations. Please show formulas. Please do not use excel.

(c) Sketch the NPV profile for project B. Also indicate the point when the discount rate is 37.01%. Please show thoroughly your calculations. Please explain how to draft a sketch in excel.

Year	Cash flow (A)	Cash flow (B)
0	-55,000	-95,000
1	19,000	18,000
2	19,000	18,000
3	19,000	18,000
4	19,000	230,013

Answer 1

Solution:-

A. To Calculate Payback Period-

Project A-

PayBack Period =

PayBack Period =

PayBack Period = 2.89 years

Project B-

Payback Period
Year	Cash Flow	Cummulative Cash Flow
0	-95000
1	18000	18000
2	18000	36000
3	18000	54000
4	230013	284013

Payback Period =

Payback Period =

Payback Period = 3.18 years

If management requires projects to have a 3-year payback then Management can only accept project A as its payback period is 2.89 years. Payback period is lower the better.

B. To Calculate Net Present Value when Discount rate is 14%-

Net Present Value = Present Value of cash Inflow - Present Value of cash Outflow

Net Present Value =

Net Present Value =

Net Present Value =

Net Present Value = $15,789.47 + $13,850.42 + $12,149.49 + $1,36,186.16 - $95,000

Net Present Value = $82,975.54

C. To Calculate Net Present Value when Discount rate is 37.01%-

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