Question

A firm has a WACC of 13.64% and is deciding between two mutually exclusive projects.

Project A has an initial investment of $62.12. The additional cash flows for Project A are:

Year 1 = $19.26

Year 2 = $37.74

Year 3 = $58.27

Project B has an initial investment of $71.69. The cash flows for Project B are:

Year 1 = $56.39

Year 2 = $37.73

Year 3 = $33.58

Calculate the following:

a. Payback period for Project A

b. Payback period for Project B

c. NPV for Project A

d. NPV for Projecr B

Answer 1

As per the details given in the question-
NPV = Pv of inflow - outflow
PV of inflow is calculated on excel by formula-
=PV(rate,nper,pmt,fv)

Project A

Year	Cashflow	Pv Of CF
0	-62.12	-62.12
1	19.26	16.95
2	37.74	29.22
3	58.27	39.71
NPV	23.76

Project A

Year	Cashflow	Cummulative CF
0	-62.12	-62.12
1	19.26	19.26
2	37.74	57
3	58.27	115.27

Payback period= 2 year + {(62.12 - 57) / 58.27
Payback period= 2 year + 0.088
Payback period=2.088 years

Project-B

Year	Cashflow	Pv Of CF
0	-71.69	-71.69
1	56.39	49.62
2	37.73	29.22
3	33.58	22.88
NPV	30.03

Project-B

Year	Cashflow	Cummulative CF
0	-71.69	-71.69
1	56.39	56.39
2	37.73	94.12
3	33.58	127.7

Payback period = 1 year + {(71.69 - 56.39 ) / 37.73
Payback period= 1 +0.4055
Payback period= 1.4055 years

I hope this clear your doubt.

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