A company is considering two alternative investment proposals. The company requi

Question

A company is considering two alternative investment proposals. The company requires a 15% return in order to consider an investment. Compute both the PAYBACK and NPV for each and indicate which is a better investment.

Investment A $50,000

Year         Cash flow

1.                 19,000

2.                  17,000

3.                   15,000

4.                  13,000

5.                 11,000

6.                 9,000

7.                 7,000

8.                 5,000

Investment b 77,000

1.       40,000

2.        35,000

3.       30,000

4.        25,000

5.        20,000

6.        15,000

7.        10,000

8.       5,000

Explanation / Answer

Hi,

Please find the answers as follows:

Part A: Payback Period:

Investment A:

The initial investment of 50000 will get recovered between Year 2 and Year 3 as 19000 (Year 1) and 17000 (Year 2) will result in a total cash inflow of = 36000

Payback Period = 2 + (50000 - 36000)/15000 = 2.93 Years

Investment B:

The initial investment of 77000 will get recovered between Year 2 and Year 3 as 40000 (Year 1) and 35000 (Year 2) will result in a total cash inflow of = 75000

Payback Period = 2 + (77000 - 75000)/30000 = 2.07 Years

Part B: NPV

Investment X = -50000 + 19000/(1+.15)^1 + 17000/(1+.15)^2 + 15000/(1+.15)^3 + 13000/(1+.15)^4 + 11000/(1+.15)^5 + 9000/(1+.15)^6 + 7000/(1+.15)^7 + 5000/(1+.15)^8 = 10297.68

Investment Y = -77000 + 40000/(1+.15)^1 + 35000/(1+.15)^2 + 30000/(1+.15)^3 + 25000/(1+.15)^4 + 20000/(1+.15)^5 + 15000/(1+.15)^6 + 10000/(1+.15)^7 + 5000/(1+.15)^8 = 40089.28

Part C:

Project B is better as it has a lesser payback period and greater NPV.

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.