Question

In: Finance

Please show work step by step, no excel. Thank you! The three alternative projects shown below...

Please show work step by step, no excel. Thank you!

The three alternative projects shown below have the expected cash flows that are given, and the cost of capital is 10%.

  1. Calculate the paybacks for all three projects. Rank the projects from best to worst based on their paybacks.
  2. Calculate the NPVs for all three projects. Rank the projects from best to worst based on their NPVs.
  3. Why are these two sets of rankings different?
year 0 1 2 3 4 5
Project A -10 4 3 2 1 5
Project B -10 1 2 3 4 5
Project C -10 4 3 2 1 10

Solutions

Expert Solution

(a)

year Project A Cumulative CF Project B Cumulative CF Project C Cumulative CF
0 -10 -10 -10 -10 -10 -10
1 4 -6 1 -9 4 -6
2 3 -3 2 -7 3 -3
3 2 -1 3 -4 2 -1
4 1 0 4 0 1 0
5 5 5 5 5 10 10

Therefore payback period of project A = 4 years (since entire initial investment is collected till the end of year 4)

Payback period of project B = 4 years (since entire initial investment is collected till the end of year 4)

Payback period of project B = 4 years (since entire initial investment is collected till the end of year 4)

Therefore, ranking of all the projects will be same based on payback period

(b)

year PVF @ 10% Project A PV Project B PV Project C PV
0               1.000 -10 -10.000 -10 -10.000 -10 -10.000
1               0.909 4 3.636 1 0.909 4 3.636
2               0.826 3 2.479 2 1.653 3 2.479
3               0.751 2 1.503 3 2.254 2 1.503
4               0.683 1 0.683 4 2.732 1 0.683
5               0.621 5 3.105 5 3.105 10 6.209
NPV 1.406 0.653 4.511
Ranking based on NPV 2 1 3

(c)

Project A Project B Project C
Ranking based on Payback period 1 1 1
Ranking based on NPV 2 1 3

Payback period is simply the time required to recover the initial investment amount

While NPV, is PV of cash inflows - PV of cash outflows.

Difference in ranking based on Payback period and NPV is due to following reasons:

Payback period simply ignores the cash flows after the initial investment is recovered

Payback period does not consider time value of money.

NPV is more scientific since it takes into consideration all the cash flows from projects based on there Present value.


Related Solutions

Please show work step by step, NO EXCEL. Thank you! The investment is $1,000,000, which is...
Please show work step by step, NO EXCEL. Thank you! The investment is $1,000,000, which is depreciated straight line to a zero salvage value over a 10 year life. The asset will be worthless in 10 years. The project will generate, annually, revenues of $800,000, cash operating expenses of $500,000, and depreciation of $100,000. The tax rate is 30%, and the cost of capital is 10%. a. what are the annual cash flow and the NPV? b. what would be...
Please show work step by step, and no Excel. Thank you! Fei Meng, Incorporated has a...
Please show work step by step, and no Excel. Thank you! Fei Meng, Incorporated has a project with the after-tax cash flows shown below. The required return (cost of capital) on the investment is 10%. Compute the:             Year 0 1 2 3 4 Cash flow -70,000 30,000 30,000 30,000 20,000 Payback Discounted payback NPV Profitability index IRR MIRR
Please show work step by step, No Excel. Thank you! Suppose miller motors can either expense...
Please show work step by step, No Excel. Thank you! Suppose miller motors can either expense or capitalize an asset it has just purchased for $9,000. if it capitalizes the asset, it will depreciate the asset to a book value of zero on a straight line basis of three years. The firm has a marginal tax rate of 38%, and the cost of capital for this asset is 12%. What is the present-value difference to the firm between expensing and...
Please solve A, B, and C. Please use excel. Please show work. Thank you. A. Use...
Please solve A, B, and C. Please use excel. Please show work. Thank you. A. Use the stocks of Apple, SAP, IBM, Oracle, and Amazon Download the historical data of weekly stock prices and S&P 500 index prices from year 2017-2019 on the website of yahoo finance and save it on an excel file. B. Use a different sheet to save the market adjusted prices of Apple, SAP, IBM, Oracle, and Amazon t and the index. For each stock, compute...
Please solve in Excel and show your work. Thank you. Calculate the value of Apples’ stocks...
Please solve in Excel and show your work. Thank you. Calculate the value of Apples’ stocks given These following inputs are from Yahoo finance to see how close the model will match the current mkt price. These are 2019 figures: FCF’s = 60 billion             growth= 5%               wacc = 7.5%         Treasury securities = 51 billion     debt = 92 billion            #shares= 4.6 billion Assume the growth rate listed is for the first 4 years and then FCF’s will grow at 3.5% thereafter....
Please show your work and formula on excel sheet. Thank you. Assume you borrow $8,000,000 with...
Please show your work and formula on excel sheet. Thank you. Assume you borrow $8,000,000 with a coupon rate of 8% from a bank as a mortgage against your newly renovated plant. The loan is paid off in 7 years. You will pay an equal amount every year until the loan is fully paid off. What are the interest and principal payments for each year of the loan.
PLEASE COMPUTE THE FOLLOWING IN EXCEL and show the excel sheet, Thank you so much! The...
PLEASE COMPUTE THE FOLLOWING IN EXCEL and show the excel sheet, Thank you so much! The following are the runs scored totals for 9 players for the 2016 New York Yankees: 56,43,63,68,58,80,71,32,19 (a) Find the mean and median (b) Find the standard deviation of this population (c) Considering this as a normal sample of American League players for the 2016 season, find a 99% Confidence Interval for the actual mean of Runs Scored for AL players, 2016 . (d) Considering...
Please solve the questions below and show your work. Thank you. The town of Utopia has...
Please solve the questions below and show your work. Thank you. The town of Utopia has three equal-size groups of people: (i) type A people consistently prefer larger public parks to smaller; type B people prefer small public parks to large public parks, and they prefer large size to medium size parks; type C people most prefer medium size to small size public parks, which they in turn prefer by a modest amount to large levels. a. Draw on a...
Please do step by step clear and show eqations used. Thank you A rocket designed to...
Please do step by step clear and show eqations used. Thank you A rocket designed to place satellites into orbit is carried to a cruising altitude. When the plane is flying in a straight line and at a constant speed of 850 km/h, the rocket is dropped. After the drop the plane continues to fly at the same pseed and in a straight line. The rocket falls for a bried time, and then its propulsion starts. Once the propulsion starts...
Please show step by step. Thank you. Shallow square footing is resting on a dry cohesionless...
Please show step by step. Thank you. Shallow square footing is resting on a dry cohesionless soil. If the groundwater table moves from great depth to ground surface and axial load of the column moves from centroid to ex = B/3 how will affect bearing capacity (Df = 0). Assume unite weight of soil is 124.8 pcf.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT