Intial Investment 140,000 cash infows 39,000.00 34,000.00 30,000.00 34,000.00 34
ID: 2806147 • Letter: I
Question
Intial Investment 140,000 cash infows 39,000.00 34,000.00 30,000.00 34,000.00 34,000.0032.000.00 31 33,000 00 34,000.00 | 34,000 00 0,000.00 34,000.00 35,000.00 51-29,000 00 34,000.00| 37.000 oo 6 26,000.00 34,000.00 39,000.00 For the projects above, calculate Payback Discounted Payback (using 10% cost of capital) NPV using 10% cost of capital) Under each technique or method, rank the projects in order of preference If the firm has a $300,000 budget for the projects, which projects should be accepted?Explanation / Answer
A
Cumulative Cash Flow
Discounted Cash Flow
Cumilative Cash Flow From Discounted Cash Flow
0
-140,000
-140,000
-140,000.00
-140,000.00
1
39,000
-101,000
35,454.55
-104,545.45
2
34,000
-67,000
28,099.17
-76,446.28
3
33,000
-34,000
24,793.39
-51,652.89
4
30,000
-4,000
20,490.40
-31,162.49
5
29,000
25,000
18,006.72
-13,155.77
6
26,000
51,000
14,676.32
1,520.55
B
Cumulative Cash Flow
Discounted Cash Flow
Cumilative Cash Flow From Discounted Cash Flow
0
-140,000
-140,000
-140,000.00
-140,000.00
1
34,000
-106,000
30,909.09
-109,090.91
2
34,000
-72,000
28,099.17
-80,991.74
3
34,000
-38,000
25,544.70
-55,447.03
4
34,000
-4,000
23,222.46
-32,224.57
5
34,000
30,000
21,111.32
-11,113.25
6
34,000
64,000
19,192.11
8,078.86
C
Cumulative Cash Flow
Discounted Cash Flow
Cumilative Cash Flow From Discounted Cash Flow
0
-140,000
-140,000
-140,000.00
-140,000.00
1
30,000
-110,000
27,272.73
-112,727.27
2
32,000
-78,000
26,446.28
-86,280.99
3
34,000
-44,000
25,544.70
-60,736.29
4
35,000
-9,000
23,905.47
-36,830.82
5
37,000
28,000
22,974.09
-13,856.73
6
39,000
67,000
22,014.48
8,157.75
a) Payback Period:
A+B/C
A=Last Period with a negative cumulative cash flow
B= is the absolute value of cumulative cash flow at the end of the period A;
C= is the total cash flow during the period after A
Project A= 4+(4/29)=4.13 Years
Project B= 4+(4/34)= 4.11 Years
Project C= 4+ (9/37)=4.24 Years
(Rank: Project B, Project A, Project C)
b) Discounted Payback :
A+B/C
A=Last Period with a discounted negative cumulative cash flow
B= is the absolute value of discounted cumulative cash flow at the end of the period A;
C= is the discounted total cash flow during the period after A
Project A= 5+(13,155.77/14,676.32)= 5.89 Years
Project B= 5+(11,113.25 /19,192.11)= 5.57 Years
Project C= 5+ (13,856.73/22,014.48)=5.62 Years
(Rank: Project B, Project C, Project A)
c) NPV is just the Cumulative discounted cash flow at the end year 6.
Project A= 1,520.55
Project B= 8,078.86
Project C= 8,157.75
(Rank: Project C, Project B, Project A)
None of the projects should be accepted. The IRR for all the projects using discounted cash flow is given below:
Project A:0.36%
Project B: 1.77%
Project C:1.71%
Since the IRR is less than the cost of capital (10% ) none of the projects should be accepted.
A
Cumulative Cash Flow
Discounted Cash Flow
Cumilative Cash Flow From Discounted Cash Flow
0
-140,000
-140,000
-140,000.00
-140,000.00
1
39,000
-101,000
35,454.55
-104,545.45
2
34,000
-67,000
28,099.17
-76,446.28
3
33,000
-34,000
24,793.39
-51,652.89
4
30,000
-4,000
20,490.40
-31,162.49
5
29,000
25,000
18,006.72
-13,155.77
6
26,000
51,000
14,676.32
1,520.55
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