Suppose the company is deciding between the two investment alternatives. The fir

Question

Suppose the company is deciding between the two investment alternatives. The first project has the following cash flows: initial cost of $1,000 and positive inflows of $600 per year for the next three years. The second project has the initial cost of $900, positive cash flow of $1200 in year 1, negative cash flow of -$300 in year 2, and positive cash flow of $400 in year 3.

Find payback and discounted payback for the two projects. If the projects are mutually exclusive (i.e., the company can only accept one of them), which project would you recommend based on your findings of payback and discounted payback? Use WACC of 7% for the discounted payback.

Please show work

Explanation / Answer

PBP of project 1.66 years and the discounted payback period is

= 600*0.935+600*0.873= 561+523.8, its Discounted PBP= 1 year + 439/523.8

=1 year 10 months

for the second project.

PBP=900/1200= 9 months is the PBP and its discounted PBP is

1200*0.935= 1122

= 900/1122= around 10 months

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