Question

Britney Javelin Company is considering two investments, both of which cost $18,000. The cash flows are as follows: Use Appendix B and Appendix D. Year Project M Project N 1 $7,000 $6,000 2 8,000 7,000 3 7,000 12,000 a. Calculate the payback period for project M and project N. (Round the final answers to 2 decimal places.) Payback period Project M years Project N years b-1. Calculate the NPV for project M and project N. Assume a cost of capital of 8 percent. (Round "PV Factor" to 3 decimal places. Round the intermediate and final answers to the nearest whole dollar.) Net present value Project M $ Project N $ b-2. Which of the two projects should be chosen based on the NPV method? Project M Project N Both c. Should a firm normally have more confidence in answer derived based on NPV method or Payback method?

NPV method Pay back method

Answer 1

	WORKSHEET:
	PROJECT M:
	Year	Cash Flow	Cumulative Cash Flow	PVIF at 8%	PV at 8%
	0	$           (18,000)	$       (18,000)	1	$         (18,000)
	1	$                7,000	$       (11,000)	0.926	$              6,482
	2	$                8,000	$         (3,000)	0.857	$              6,856
	3	$                7,000	$            4,000	0.794	$              5,558
					$                 896
	Payback period = 2+3000/7000 =		2.43	Years
	NPV =			$                896
	PROJECT N:
	Year	Cash Flow	Cumulative Cash Flow	PVIF at 8%	PV at 8%
	0	$           (18,000)	$       (18,000)	1	$         (18,000)
	1	$                6,000	$       (12,000)	0.926	$              5,556
	2	$                7,000	$         (5,000)	0.857	$              5,999
	3	$              12,000	$            7,000	0.794	$              9,528
					$              3,083
	Payback period = 2+5000/12000 =		2.42	Years
	NPV =			$            3,083
	ANSWERS:
		Project M	Project N
a]	Payback period in years	2.43	2.42
b-1]	NPV =	$                    896	$            3,083
b-2]	Based on NPV, Project N should be chosen, as it has higher NPV.
c]	A firm should normally have more confidence in answer derived based on:
	NPV method