Kaleb Konstruction, Inc., has the following mutually exclusive projects availabl

Question

Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 11 percent.

A) Calculate the payback period for both projects (round answer to 2 decimal places)

B) Calculate the NPV for both parties (round answers to 2 decimal places)

C) Which project should the company accept?

Year   Project F   Project G 0 –$ 134,000      –$ 204,000      1 60,500      40,500      2 49,500      55,500      3 59,500      89,500      4 54,500      119,500      5 49,500      134,500     

Explanation / Answer

When cash inflows are uneven, we need to calculate the cumulative net cash flow for each period and then use the following formula for payback period:

In the above formula,
A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A

Project F = 2 + 24,000/59,500

= 2.4 years

Project G = 3 + 18,500/119,500

= 3.15 years

B) calculating NPV

PV of cashflow = cash flow / (1+i)^n

i = 11%, n= number of period

NPV is a better because it consider the time value of money.

Project G has the higher NPV , thus it should be accepted.

Payback Period = A + B C

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