Question

All techniques, conflicting rankings Nicholson Roofing Materials, Inc., is considering two mutually exclusive projects, each with an initial investment of $190,000. The company's board of directors has set a 4-year payback requirement and has set its cost of capital at 8%. The cash inflows associated with the two projects are shown in the following table: a. Calculate the payback period for each project. Rank the projects by payback period. b. Calculate the NPV of each project. Rank the project by NPV. c. Calculate the IRR of each project. Rank the project by IRR. d. Make a recommendation. a. The payback period of project Ais L years. (Round to two decimal places.) Data Table The payback period of project Bis years. (Round to two decimal places.) According to the payback method, which project should the firm choose? (Select the best answer below.) (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) O A. Project B O B. Project A b. The NPV of project Ais L. (Round to the nearest cent.) The NPV of project B is $ . (Round to the nearest cent.) Cash inflows (CF) Project A Project B $60,000 $85,000 $60,000 $70,000 $60,000 $50,000 $60,000 $50,000 $60,000 $50,000 $60.000 $50,000 According to the NPV method, which project should the firm choose? (Select the best answer below.) O A. Project A O B. Project B Print Done C. The IRR of project Ais %. (Round to two decimal places.) The IRR of project Bis %. (Round to two decimal places.) According to the IRR method, which project should the firm choose? (Select the best answer below.) O A. Project A O B. Project B d. Which project will you recommend? (Select the best answer below.) O O Project B Project A

Answer 1

Project A

Payback period=full years until recovery + unrecovered cost at the start of the year/cash flow during the year

   = 3 years +($190,000 - $180,000)/ $60,000

   = 3 years + $10,000/ $60,000

= 3 years + 0.1667

= 3.17 years.

Project B

Payback period=full years until recovery + unrecovered cost at the start of the year/cash flow during the year

= 2 years +($190,000 - $155,000)/ $50,000

= 3 years + $35,000/ $50,000

= 3 years + 0.70

= 3.70years.

Ranking of projects by payback method:

1.Project A

2.Project B

According to the payback method, the firm should choose Project A since it has the shortest payback period.

Project A

This can also be calculated using a financial calculator by inputting the below:

• •   Press the CF button.
• •   CF0= -$190,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
• •   Cash flow for each year should be entered.
• •   Press Enter and down arrow after inputting each cash flow.
• •   After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 8%.
• •   Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value is $87,372.7798 $87,372.78.

Project B

This can also be calculated using a financial calculator by inputting the below:

• •   Press the CF button.
• •   CF0= -$190,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
• •   Cash flow for each year should be entered.
• •   Press Enter and down arrow after inputting each cash flow.
• •   After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 8%.
• •   Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value is $90,698.1670 $90,698.17.

Ranking of projects by net present value:

1.Project B

2.Project A

According to the net present value the firm should choose Project B since it has the highest internal rate of return.

Project A

This can be calculated using a financial calculator by inputting the below:

• •   Press the CF button.
• •   CF0= -$190,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
• •   Cash flow for each year should be entered.
• •   Press Enter and down arrow after inputting each cash flow.
• •   After entering the last cash flow cash flow, press the IRR button and the IRR of the project.

The IRR is 22%.

Project B

This can be calculated using a financial calculator by inputting the below:

• •   Press the CF button.
• •   CF0= -$190,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
• •   Cash flow for each year should be entered.
• •   Press Enter and down arrow after inputting each cash flow.
• •   After entering the last cash flow cash flow, press the IRR button and the IRR of the project.

The IRR is 24.58%.

Ranking of projects by internal rate of return:

1.Project B

2.Project A

According to the internal rate of return, the firm should choose Project B since it has the highest internal rate of return.

I will recommend Project B since it has the highest net present value.

In case of any query, kindly comment on the solution