Question

The table shows the investment projected net cash inflows of the two projects over the coming 5 years.

Year	Project A	Project B
1	$200000	$120000
2	$200000	$130000
3	$200000	$150000
4	$200000	$200000
5	$200000	$240000

Initial investment of $500000 and discount rate at 18% per year under each project.

Discount factors for Year 1 to Year 5 as follows:

Year 1	0.8475
Year 2	0.7182
Year 3	0.6086
Year 4	0.5158
Year 5	0.4370

1. Find the payback period in years for each project. (please show step clearly)
2. Finish an evaluation for project A and project B using net present value at the above discount rate for year 1 to year 5.
3. Which one of projects is the best investment for the business? Explain your reason clearly.

Answer 1

	Cash flow		Cumulative cash flow			Present value
Year	Project A	Project B	Project A	Project B	PVIF @5%	Project A	Project B
0	(500,000)	(500,000)	($500,000)	($500,000)	1	($500,000)	($500,000)
1	$200,000	$120,000	($300,000)	($380,000)	0.8475	$169,500	$101,700
2	$200,000	$130,000	($100,000)	($250,000)	0.7182	$143,640	$93,366
3	$200,000	$150,000	$100,000	($100,000)	0.6086	$121,720	$91,290
4	$200,000	$200,000	$300,000	$100,000	0.5158	$103,160	$103,160
5	$200,000	$240,000	$500,000	$340,000	0.437	$87,400	$104,880
						$125,420	($5,604)
Ans a)	Payback period A =		=2+100000/200000		2.5	year
	Payback period B =		=3+100000/200000		3.5	year
Ans b)	NPV A =	$125,420
	NPV B =	($5,604)
Ans c)	We can see that NPV of project A is positive while for project B is negative.
	Therefore project A should be selected.