Question

Greystone, Inc., has the following mutually exclusive projects:

Year Project A Project B

0 –$ 13,600 –$ 9,000

1 8,200 3,700

2 6,800 3,200

3 2,100 5,600

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

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

c. If the appropriate discount rate is 15 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.)

Answer 1

	A
Year	Cash Flow	Cumulative Cashflow [currecnt cash flow + all previous cashflows]
1	8200	8200
2	6800	15000
3	2100	17100
		As Initial Outlay is 13600, it will be recoverd in between year 1 & 2. Therefore, Payback Period will be between 1st and 2nd year.
		Payback Period will be 1 years + proportionate of 2nd year Payback Period = 1+[(13600-8200)/(15000-8200)]
		Payback Period = 1.7941 years

	B
Year	Cash Flow	Cumulative Cashflow [currecnt cash flow + all previous cashflows]
1	3700	3700
2	3200	6900
3	5600	12500
		As Initial Outlay is 9000, it will be recoverd in between year 2 & 3. Therefore, Payback Period will be between 2nd and 3rd year.
		Payback Period will be 2 years + proportionate of 3rd year Payback Period = 2+[(9000-6900)/(12500-6900)]
		Payback Period = 2.375 years

b)

Lower the Payback Period, Better the Project. Therefore, Project A sjould be choosen.

c)

	15%
Period	Discounting Factor [1/(1.15^year)]	Cash Flows	PV of Cash Flows (discounting factor*cash flow)
A	B	A	B
0	1	-13600	-9000	-13600	-9000
1	0.869565217	8200	3700	7130.434783	3217.391304
2	0.756143667	6800	3200	5141.776938	2419.659735
3	0.657516232	2100	5600	1380.784088	3682.090902
			NPV= Sum of PVs	52.99580833 = $53	319.1419413 = $319.14