Question

1. Toby is considering two hotel projects. Project A will be in Jamaica with an initial investment of $865,000 and Project B will be in Canada with an initial investment of $750,000.

years	Project a	Project b
Yr1	316000	200000
Yr2	350000	200,000
Yr3	(20000)	(15000)
yr 4	280000	390000

The cost of capital for Project A is 13% and the cost of capital for project B is 15%.
Calculate the following;

1. Calculate the discounted payback period of Project A.                                    
   
2. Calculate the discounted payback period of Project B.                                       
   
3. Calculate the net present value for Project A.                                                   
   
   
4. Calculate the net present value for Project B.   

Managemet can only accept one project. Which project should management accept? Explain your answer.                        

Answer 1

Year	Cash flows of Project A	Discount factor@13%	Present Value@13%	Discounted cumulative cashflow	Cash flows of Project B	Discount factor@15%	Present Value@15%	Discounted cumulative cashflow
-	(865,000.00)	1.00	(865,000.00)	(865,000.00)	(750,000.00)	1.00	(750,000.00)	(750,000.00)
1.00	316,000.00	0.88	279,646.02	(585,353.98)	200,000.00	0.87	173,913.04	(576,086.96)
2.00	350,000.00	0.78	274,101.34	(311,252.64)	200,000.00	0.76	151,228.73	(424,858.22)
3.00	(20,000.00)	0.69	(13,861.00)	(325,113.65)	(15,000.00)	0.66	(9,862.74)	(434,720.97)
4.00	280,000.00	0.61	171,729.24	(153,384.40)	390,000.00	0.57	222,983.77	(211,737.20)
	NPV		(153,384.40)		NPV		(211,737.20)

Ans a & b

Since both the projects (a and b) has negative cumulative discpunted cashflows it means that the initial outlays are not paid within the life of the project. So the discounted payback period cannot be computed.

Ans c & d

NPV as computed above are project a= $(153384.4) and project b=$(211737.20)

Note: NPV is the present value of cash inflows less present value of cash outflows.