Question

Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for both projects is 11 percent.

  

Year	AZM Mini-SUV			AZF Full-SUV
0	–$	520,000		–$	870,000
1		334,000			364,000
2		208,000			448,000
3		164,000			304,000

  

a.	What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

   

b.	What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

   

Answer 1

a) Calculation of Payback Period

Step 1 : Calculate the Cumulative net cash flow.

Step 2 : Calculation of Pay back Period  

Payback Period = A +B/C

where,
A is the last period number in which cash flow is negative or 0
B is the absolute cumulative net cash flow (ignoring negative sign) at the end of the period A
C is the total cash inflow during the period next to period A  

(i) Calculation of Payback Period of AZM Mini-SUV

Year	AZM Mini-SUV	Cumulative Cash Flows
0	$(520,000.00)	$(520,000.00)
1	$334,000.00	$(186,000.00)
2	$208,000.00	$22,000.00
3	$164,000.00	$186,000.00

Payback Period = A +B/C
Payback Period = 1 + 186000 / 208000
Payback Period = 1 + 0.8942
Payback Period = 1.8942

(ii) Calculation of Payback Period of AZFFull-SUV

Year	AZFFull-SUV	Cumulative Cash Flows
0	$(870,000.00)	$(870,000.00)
1	$364,000.00	$(506,000.00)
2	$448,000.00	$(58,000.00)
3	$304,000.00	$246,000.00

Payback Period = A +B/C
Payback Period = 2 + 58,000 / 304,000
Payback Period = 2 + 0.1908
Payback Period = 2.1908

b) Calculation of NPV for each project discount rate for both projects is 11%

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

(i) Calculation of NPV of AZM Mini-SUV

Year	AZM Mini-SUV	PVF@11%	Present value
0	$(520,000.00)	1	$(520,000.00)
1	$334,000.00	0.900900901	$300,900.90
2	$208,000.00	0.811622433	$168,817.47
3	$164,000.00	0.731191381	$119,915.39
		NPV	$69,633.75

(ii) Calculation of NPV of AZFFull-SUV

Year	AZFFull-SUV	PVF@11%	Present value
0	$(870,000.00)	1	$(870,000.00)
1	$364,000.00	0.900900901	$327,927.93
2	$448,000.00	0.811622433	$363,606.85
3	$304,000.00	0.731191381	$222,282.18
		NPV	$43,816.96

Note :
PVF(r,t) = (1/(1+r))^n