Question

Q2) A firm has a WACC of 14.77% and is deciding between two mutually exclusive projects.

Project A has an initial investment of $61.45. The additional cash flows for project A are: year 1 = $18.85, year 2 = $37.44, year 3 = $48.10.

Project B has an initial investment of $74.40. The cash flows for project B are: year 1 = $51.81, year 2 = $48.58, year 3 = $25.93. 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

Answer :

a) Payback Period for Project A: 2.11 Years

b) Payback Period for Project B: 1.465 Years

c) NPV for Project A: $ 15.21

d) NPV for Project B : $ 24.78

Note:

a) Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 2+(5.16/48.10)

= 2.11 Years

Year	Investment	Cash Inflow	Net Cash Flow
0	-61.45	-	-61.45	(Investment + Cash Inflow)
1	-	18.850	-42.600	(Net Cash Flow + Cash Inflow)
2	-	37.440	-5.160	(Net Cash Flow + Cash Inflow)
3	-	48.100	42.940	(Net Cash Flow + Cash Inflow)

b)  Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 1+(22.59/48.58)

= 1.465 Years

Year	Investment	Cash Inflow	Net Cash Flow
0	-74.40	-	-74.40	(Investment + Cash Inflow)
1	-	51.81	-22.590	(Net Cash Flow + Cash Inflow)
2	-	48.58	25.990	(Net Cash Flow + Cash Inflow)
3	-	25.93	51.920	(Net Cash Flow + Cash Inflow)

c) NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= [18.85*1/(1.1477)^1+37.44*1/(1.1477)^2+48.10*1/(1.1477)^3]-61.45

= $ 15.21

d)

NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= [51.81*1/(1.1477)^1+48.58*1/(1.1477)^2+25.93*1/(1.1477)^3]-74.40

= $ 24.78