0 1 2 3 4 5 Project-A cash flow (A) -250000 4000 5000 5000 7000 10000 Project b
ID: 2759923 • Letter: 0
Question
0
1
2
3
4 5
Project-A cash flow (A)
-250000
4000
5000
5000
7000 10000
Project b cash flow (b) -250000 8000 7000 5000 5000 40000
Whichever project is chosen, if any, you require a 5% return on your investment.
8. What is the payback period for each project? If you base your decision on which project has the shortest payback, which will you choose?
0
1
2
3
4 5
Project-A cash flow (A)
-250000
4000
5000
5000
7000 10000
Explanation / Answer
A. By using NPV
NPV of A=-250000+4000(1.05)^-1+5000(1.05)^-2+5000(1.05)^-3+7000(1.05)^-4+10000(1.05)^-5
=-250000+4000(.9524)+5000(.9070)+5000(.8638)+7000(.8227)+10000(.7835)
=-250000+3809.52+4535.15+4319.19+5758.92
+7835.26
= -223741.96
NPV of
B=-250000+8000(1.05)^-1+7000(1.05)^-2+5000(1.05)^-3+5000(1.05)^-4+40000(1.05)^-5
=-250000+8000(.9524)+7000(.9070)+5000(.8638)+5000(.8227)+40000(.7835)
=-250000+7619.05+6349.21+4319.19+4113.51+
31341.05
= - 196258
As both the project has negative NPV ,no project should be selected
B.
Pay back period =initial investment/cash flow per period
Here the cash flow is different in every period so we calculate the cumulative cash flow of each project
Both the project are not able to pay back its investment so both should not be selected. But if it is neccessary to select one of them then project B should be selected as payback is faster in project B.
0 1 2 3 4 5 Cumulative cash flow-A -250000 -246000 -241000 -236000 -229000 -219000 Cumulative cash flow-B -250000 -242000 -235000 -230000- -225000 -185000Related Questions
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