Question

your manager has identified two possible investment projects A and B that are expected to last for four years. The jnitial investment is $225000 for project A and $350000 for project B . the manager estimates the companys cost of capital is 9%

the expected cash flow for each project over next four years are:

year 1,2 ,3 ,4

projectA 60000, 80000,85000,75000

project B 130000,115000,100000,85000

Required

1. calculate the net present value for both projects

2. calculate the discounted payback period for both projects

Answer 1

Answer :

1. NPV for both projects :

Year	Project A Cash Flows	Project B Cash Flows	PVF @9%	Discounted Cash Flow of Project A	Discounted Cash Flow of Project B
1	60000	130000	0.91743119266	55045.87156	119266.055
2	80000	115000	0.84167999327	67334.39946	96793.19923
3	85000	100000	0.77218348006	65635.59581	77218.34801
4	75000	85000	0.70842521107	53131.89083	60216.14294
			Present Value of Cash Inflow	241147.7577	353493.7452
			Less : Cash Outflow	225000	350000
			NPV	16147.75766	3493.745218

2. Discounted Payback period for both project :

Year	Project A Cash Flows	Project B Cash Flows	PVF @9%	Discounted Cash Flow of Project A	Cumulative Discounted Cash Flow	Discounted Cash Flow of Project B	Cumulative Discounted Cash Flow
1	60000	130000	0.91743119266	55045.87156	55045.87156	119266.055	119266.055
2	80000	115000	0.84167999327	67334.39946	122380.271	96793.19923	216059.2543
3	85000	100000	0.77218348006	65635.59581	188015.8668	77218.34801	293277.6023
4	75000	85000	0.70842521107	53131.89083	241147.7577	60216.14294	353493.7452

Payback Period = Complete Years + Remaining Cash flow / Cashflow for the year to be recovered

Project A Payback Period = 3 + [(225000-188015.8668) / 53131.89083]

= 3 + [36984.1332/53131.89083]

= 3 + 0.6961

= 3.6961 Years

Project B Payback Period = 3 + [(350000-293277.6023) / 60216.14294]

= 3 + [56722.3977/60216.14294]

= 3 + 0.942

= 3.942 Years