Question

Problem 17 Intro WH Smith Company is evaluating three projects: A, B, C, with cash flows as given in the table. Each project requires an initial investment of $94,000 and has a required return of 6%. Year A B C 50,000 0 20,000 40,000 50,000 40,000 20,000 50,000 40,000 10,000 40,000 40,000 Attempt 1/5 for 10 pts. Part 1 IB What is the payback period for project A (in years)? 2+ decimals Submit Attempt 1/5 for 10 pts. Part 2 What is the payback period for project B (in years)? 2+ decimals

Answer 1

Payback period is the period in which we are able to recover our initial investment.

Payback period of A will be:

= 2 years + amount of initial investment to be recovered / next years cash flow

= 2 years + $ 4,000 / $ 20,000

= 2.2 years

Payback period of B will be:

= 2 years + amount of initial investment to be recovered / next years cash flow

= 2 years + $ 44,000 / $ 50,000

= 2.88 years

Payback period of C will be:

= 2 years + amount of initial investment to be recovered / next years cash flow

= 2 years + $ 34,000 / $ 40,000

= 2.85 years

Since the payback period of A is the lowest, hence the same is the best among all the three projects.

NPV of project A is computed as shown below:

= - $ 94,000 + $ 50,000 / 1.06¹ + $ 40,000 / 1.06² + $ 20,000 / 1.06³ + $ 10,000 / 1.06⁴  

= $ 13,483 Approximately

NPV of project B is computed as shown below:

= - $ 94,000 + $ 0/ 1.06¹ + $ 50,000 / 1.06² + $ 50,000 / 1.06³ + $ 40,000 / 1.06⁴  

= $ 24,165 Approximately

NPV of project C is computed as shown below:

= - $ 94,000 + $ 20,000 / 1.06¹ + $ 40,000 / 1.06² + $ 40,000 / 1.06³ + $ 40,000 / 1.06⁴  

= $ 25,736 Approximately

Since the NPV of the project C is highest among all the three projects, hence the same shall be accepted.

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