Question

X-treme Vitamin Company is considering two investments, both of which cost $20,000. The cash flows are as follows:

Year	Project A			Project B
1	$	23,000		$	20,000
2		10,000			9,000
3		10,000			15,000

Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a-1. Calculate the payback period for Project A and Project B. (Round your answers to 2 decimal places.)
  

a-2. Which of the two projects should be chosen based on the payback method?
  

• Project A

• Project B

b-1. Calculate the net present value for Project A and Project B. Assume a cost of capital of 8 percent. (Do not round intermediate calculations and round your final answers to 2 decimal places.)
  

Answer 1

a-1			Project A		Project B
	Payback Period	0.87 Years	1.00 Years
	Working:
	Payback period is the time within which cost of project is recovered.
	Payback of Project A	=	20000/23000
		=	0.87
	Cash flow of project B is equal to initial cost in year 1.
	So, Payback of Project B is 1.00 Years.
a-2
	Project A
	Project A should be chosen as it has lesser time to recover initial cost.
b-1.
	Net Present Value of :
	Project A	$   17,808.01
	Project B	$   18,142.05
	Working:
	Project A
	Year	Cash flow	Discount factor	Present Value
	a	b	c=1.08^-a	d=b*c
	0	$ -20,000.00	1.0000	$ -20,000.00
	1	$   23,000.00	0.9259	$   21,296.30
	2	$   10,000.00	0.8573	$     8,573.39
	3	$   10,000.00	0.7938	$     7,938.32
		NPV		$   17,808.01
	Project B
	Year	Cash flow	Discount factor	Present Value
	a	b	c=1.08^-a	d=b*c
	0	$ -20,000.00	1.0000	$ -20,000.00
	1	$   20,000.00	0.9259	$   18,518.52
	2	$     9,000.00	0.8573	$     7,716.05
	3	$   15,000.00	0.7938	$   11,907.48
		NPV		$   18,142.05