Solution: Show your work! a) Payback Method Diaz Camera Company Payback for A Ye
ID: 2692852 • Letter: S
Question
Solution: Show your work!
a) Payback Method
Diaz Camera Company
Payback for A Years
Project A $10,000
Project B $10,000
Cost of Capital 10%
Payback for B Years
Year Project A Project B
1 $6,000 $5,000
2 $4,000 $3,000
3 $3,000 $8,000
b) NPV METHOD
Project A Present Project B Present
Year Cash Flow PVIF @ 10% Value Year Cash Flow PVIF @ 10% Value
1 1
2 2
3 3
Present Value of Inflows =
Present Value of Inflows =
Present Value of Outflows =
Present Value of Outflows =
Net Present Value =
Net Present Value =
c) Should a firm normally have more confidence in answer a or answer b? Explain.
Solution: Show your work!
a) Payback Method
Diaz Camera Company
Payback for A Years
Project A $10,000
Project B $10,000
Cost of Capital 10%
Payback for B Years
Year Project A Project B
1 $6,000 $5,000
2 $4,000 $3,000
3 $3,000 $8,000
b) NPV METHOD
Project A Present Project B Present
Year Cash Flow PVIF @ 10% Value Year Cash Flow PVIF @ 10% Value
1 1
2 2
3 3
Present Value of Inflows =
Present Value of Inflows =
Present Value of Outflows =
Present Value of Outflows =
Net Present Value =
Net Present Value =
c) Should a firm normally have more confidence in answer a or answer b? Explain.
Explanation / Answer
Diaz Camera Company
$10,000 – $6,000 1 year $10,000 – $5,000 1 year
4,000 – 4,000 2 years 5,000 – 3,000 2 years
2,000 / 8,000 2.25 years
===============
Year Cash flow Present value @ 10%
1 $6,000 $5,454
2 4,000 3,306
3 3,000 2,254
Present value of inflows $11,014
Initial investment 10,000
NPV (net present value) $ 1,014
NPV for Project B
Year Cash flow Present value @ 10%
1 $5,000 $4,545
2 3,000 2,479
3 8,000 6,011
Present value of inflows $13,035
Initial investment 10,000
NPV (net present value) $ 3,035
Both projects are attractive, but project B adds the most value to the firm. It has the higher NPV.
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