Section 2 (8 points). Payback Period Mr. Kramer and Mr. Newman consider a couple

Question

Section 2 (8 points). Payback Period Mr. Kramer and Mr. Newman consider a couple of choices for starting a new business. One of those choices is the business of collecting and reselling empty bottles and cans, and the other one is to create a bladder system for oil tankers that will put an end to all future oil spills. They have come with the estimates of the projects' initial costs and future cash flows they are expected to generate during next five years that are shown in table below. Based on the information given in the table, answer the following questions. Table. Pro initial costs and future cash flows of the projects during the next five years Year l Project "Bottles & Cans" | Project “Bladder System", $30,000)-initial cost 6,000 12,000 15,000 1,000 $30,000)-initial cost 8,000 8,000 8,000 8,000 8,000 1. What is the payback period for the project "Bottles &Cans;"? If the entrepreneurs require two-year payback period on this investment, then would it be acceptable? (3 points) 2. What is the payback period for the project "Bladder System? If the entrepreneurs require four-year payback period on this investment, then would it be acceptable? (3 points) 3. If the entrepreneurs want to recover their initial investment in 3 years, which project would they choose and why? (2 points) Don't forget to sign this homework and save the file under appropriate name! Extra Credit Section. If Newman and Kramer require 8% annual rate of return, then which project would they choose. Bottles & Cans" or "Bladder System"?

Explanation / Answer

1)Calculation of payback period 2)Calculation of payback period Bottle & Cans Blader system Year Projected cashflows Cumulative projected cashflows Year Projected cashflows Cumulative projected cashflows 1 6000 6000 1 8000 8000 2 12000 18000 2 8000 16000 3 15000 33000 3 8000 24000 4 1000 34000 4 8000 32000 5 0 34000 5 8000 40000 Initial cost=30000$ Initial cost=30000$ This will be in between 2 nd and 3 rd ydear This will be in between 3 rd and 4 th year For 1 year cashflows=15000 For one year cashflows=8000 1250 9.6 666.6667 9 Pay back period= 2 years 9 months and 6 days Pay back period= 3 years 9 months Project can not accept Project can accept 3)If the enterprise want to recover initial investment with in 3 year then Botle & cans project is accepted Extra credit section: Bottle & Cans Year Blader system 1 Projected cashflows PVF & 8% PV Of cash flows Year Projected cashflows PVF & 8% 2 6000 0.926 5556 1 8000 0.926 7408 3 12000 0.857 10284 2 8000 0.857 6856 4 15000 0.794 11910 3 8000 0.794 6352 5 1000 0.735 735 4 8000 0.735 5880 0 0.681 0 5 8000 0.681 5448 28485 31944 Initial Investment 30000 Initial investment 30000 NPV -1515$ 1944$ NPV NPV is positive for Blader systems hence blader system accepted

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