Recycle Paper Company utilizes the payback method to evaluate investment proposa

Question

Recycle Paper Company utilizes the payback method to evaluate investment proposals. It is presently considering two investment opportunities: Compute the payback period for each of the investments. If the firm utilized a payback cutoff standard of three years which, if either, of the investments would be acceptable? As a recent employee of Recycle Paper Company (above), you recognize the deficiencies of the payback method. After deriving the firm's required rate of return (cost of capital), you desire to illustrate alternative approaches to your boss. Assuming a cost of capita of 14%, calculate the NPV of investment proposals A and B. Should Recycle accept either of the investment proposals?

Explanation / Answer

a) 100,000-25,000*4=0 so payback is 4 years.

500,000- 125,000-250,000=125,000 125000/300000= .4167

Payback is 2.4 years

b) A would not be acceptable; B would

A NPV is (7518.92) negative so reject.

B NPV is 201,052.05 so accept

NPV's were calculated using a TI BAII financial calculator.

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