Question

Q2) A firm has a WACC of 9.32% and is deciding between two mutually exclusive projects. Project A has an initial investment of $62.78. The additional cash flows for project A are: year 1 = $17.67, year 2 = $36.32, year 3 = $48.38. Project B has an initial investment of $72.71. The cash flows for project B are: year 1 = $51.70, year 2 = $39.41, year 3 = $22.75. Calculate the Following: a) Payback Period for Project A: (2 points) b) Payback Period for Project B: (2 points) c) NPV for Project A: (2 points) d) NPV for Project B: (2 points)

Answer 1

a.Payback period= Full years until recovery + unrecovered cost at the start of the year/cash flow during the year

Payback method= 2 years + 8.79/ 48.38

                                = 2 years + 0.18

                                = 2.18 years.

b.Payback period= 1 year + $21.01/ $39.41

                                 = 1 year + 0.53

                                 = 1.53 years.

c.Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$62.78. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the weighted average cost of capital of 9.32%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows of project A at 9.32% weighted average cost of capital is $20.81.

d.Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$72.71. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the weighted average cost of capital of 9.32%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows of project B at 9.32% weighted average cost of capital is $24.97.

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