Consider the following cash flows from different projects Project\'s Cash Flow (

Question

Consider the following cash flows from different projects Project's Cash Flow ($) -5,000 2,000 1,500 1,500 500 500 1,500 -4,000 5,000 3,000 -2,500 -1,000 1,000 2,000 3,000 0 -7,500 2,000 2,000 2,000 4,000 5,000 -3,500 2 4 800 800 (a) Calculate the payback period tor each project. (b) Determine whether it is meaningful to calculate a payback period for project D (c) Assuming that 1-10%, calculate the discounted payback period for each project. (d) Assuming that cost of capital = 10%. Calculate the NPV of each project. (e) Calculate the IRR of each project

Explanation / Answer

Answer a.

Years

Project D

Cumulative Cashflow = current year cashflow + previous year cumulative cashflow

0

-4000

-4000

1

5000

1000

2

3000

4000

3

-2500

1500

4

-1000

500

5

1000

1500

6

2000

3500

7

3000

6500

The payback of the project is in year 1 itself but it has multiple cash outflows during other years too which makes impossible to calculate payback period for the project

Answer b.
No it is not meaningful to calculate a payback period for project D as it has multiple cash outflows during the life of the project.

Answer c. Answer d. Answer e.
The discounted payback period and NPV at 10% cost of capital and IRR for each project is as below:

Years

Project A

Discounted Cashflow = cashflow / (1.1)^n

Cumulative discounted Cashflow = current year discounted cashflow + previous year cumulative discounted cashflow

0

-3500

-3500

-3500

1

800

727

-2773

2

800

661

-2112

3

800

601

-1511

4

800

546

-964

5

800

497

-467

6

800

452

-16

7

800

411

395

8

800

373

NPV at 10%

$698.13

Payback period =6+(411-395)/411

IRR

15.777%

6.039

Years

Project B

Discounted Cashflow = cashflow / (1.1)^n

Cumulative discounted Cashflow = current year discounted cashflow + previous year cumulative discounted cashflow

0

-5000

-5000

-5000

1

2000

1818

-3182

2

1500

1240

-1942

3

1500

1127

-815

4

500

342

-474

5

500

310

-163

6

1500

847

684

NPV at 10%

$621.37

Payback period = 5+(847-684)/847

IRR

15.373%

5.192

Years

Project C

Discounted Cashflow = cashflow / (1.1)^n

Cumulative discounted Cashflow = current year discounted cashflow + previous year cumulative discounted cashflow

0

-7500

-7500

-7500

1

2000

1818

-5682

2

2000

1653

-4029

3

2000

1503

-2526

4

4000

2732

206

5

5000

3105

3310

NPV at 10%

$3,009.42

Payback period = 3+(2732-206)/2732

IRR

23.245%

3.925

Years

Project D

Discounted Cashflow = cashflow / (1.1)^n

Cumulative discounted Cashflow = current year discounted cashflow + previous year cumulative discounted cashflow

0

-4000

-4000

-4000

1

5000

4545

545

2

3000

2479

3025

3

-2500

-1878

1147

4

-1000

-683

463

5

1000

621

1084

6

2000

1129

2213

7

3000

1539

3753

NPV at 10%

$3,411.67

IRR

55.735%

The payback of the project is in year 1 itself but it has multiple cash outflows during other years too which makes impossible to calculate payback period for the project

Years

Project D

Cumulative Cashflow = current year cashflow + previous year cumulative cashflow

0

-4000

-4000

1

5000

1000

2

3000

4000

3

-2500

1500

4

-1000

500

5

1000

1500

6

2000

3500

7

3000

6500

The payback of the project is in year 1 itself but it has multiple cash outflows during other years too which makes impossible to calculate payback period for the project

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