Use the following information to solve problems 1-2. Show your work! ABC Corpora

Question

Use the following information to solve problems 1-2. Show your work! ABC Corporation is considering two investment projects, A and B. Each investment project would require an initial investment of $9000. The estimated positive cash flows from the two investment projects are: Project A Project B cash cash year flow 1 $1400 2 S3400 3 $4000 4 $4000 year flow 1 -$1600 2 $2200 3 $5500 4 $7800 I. Using an interest rate of 6.5%, find the net present value (NPV) for both projects. 2. Find the payback period (PB) for each project.

Explanation / Answer

1.

NPV of A = 1,732.88

Payback of A = 3 + (9000-1400-3400-4000)/4000 = 3.05 years

NPV of B = 2053.59

NPV of B = 3 + (9000+1600-2200-5500)/7800 = 3.37 years

6.50% Cash flows Year Discounted CF            (9,000.00) 0 -9000.00               1,400.00 1 1314.55               3,400.00 2 2997.64               4,000.00 3 3311.40               4,000.00 4 3109.29

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