Question

Britney Javelin Company is considering two investments, both of which cost $46,000. The cash flows are as follows: Use Appendix B and Appendix D.

Year	Project M			Project N
1		$24,000			$19,000
2		19,000			23,000
3		16,000			20,000

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

Answer 1

a)

cash outflow for M and N = 46000
project M		project N
year	cashflow	cumulative cashflow		year	cashflow	cumulative cashflow
1	24000	24000		1	19000	19000
2	19000	43000		2	23000	42000
3	16000	59000		3	20000	62000

PROJECT M

Pay back period= 2 years +[ (46000-43000)/ (59000-43000) ] * 12

2 years + (3000/16000) * 12

2 years + .1875 * 12

2 years and 2.25 months

Payback period of M = 2 years and 2.25 months

PROJECT N

Pay back period= 2 years +[ (46000-42000)/ (62000-42000) ] * 12

2 years + (4000/20000) * 12

2 years + .2 * 12

2 years and 2.4 months

Payback period of N = 2 years and 2.4 months

b-1)

cash outflow for M and N = 46000
project M		project N
year	cashflow	pvf @ 8%	present value		year	cashflow	pvf @ 8%	present value
1	24000	0.926	22224		1	19000	0.926	17594
2	19000	0.857	16283		2	23000	0.857	19711
3	16000	0.794	12704		3	20000	0.794	15880
Total present value	51211		Total present value	53185
(less) cash outflow	-46000		(less) cash outflow	-46000
Net Present Value (NPV)	5211		Net Present Value (NPV)	7185

b-2)

Project M and Project N showing positive NPV. According to the NPV method the Britney Javelin Company can select the Project N, because which have higher NPV as compared to Project M.