Question

4 A B C D E F G H I 1 Consider the following cash flows of two mutually exclusive projects for Spartan rubber company. 2 Assume the discount rate for both projects is 10%. Year Dry Solvent Prepreg Prepeg 0 -1,800,000 -925,000 1 690,000 565,000 21 430,000 410,000 3 1,400,000 340,000 10 a.) Based on the payback period, which project should be taken? 11 12 b.) Based on NPV, which project should be taken 13

Answer 1

X forx X N12 В C D E G Н К L M N P Q R 1 Payback Period is the period need to recover the initial investment using the Cash Inflows 2 а. 3 Dry Prepreg 4 5 Net Invested Cash Flow Year Cash 6 -1,800,000 7 0 -1,110,000 +690,000 1 -680,000 +430,000 9 2. 10 To recover balance $680,000 we need 680,000/1,400,000 0.49 years 11 Therefore, Payback Period =2.49 years 12 13 Solvent Preperg 14. 15 Net Invested Cash Flow Year Cash 16 -925,000 -360,000 17 0 18 1 +565,000 19 To recover balance $360,000 we need 360,000/410,000 0.88 years Therefore, Payback Period 1.88 years 20 21 22 Based on Payback Period, Solvent Preperg should be selected 23 24 25 26 Dry Prenreo Sheet98 Discounted PBP 11:23 PM ENG 11/23/2019

X X N25 В C D F G Н К L M O P Q R S 25 Dry Prepreg 26 27 Cash Flows ($) -1,800,000 690,000 430,000 1,400,000 PV of Cash Flows 28 Year PV Factor 29 0 1 -1,800,000.00 0.9091 30 1 627,272.73 0.8264 355,371.90 31 2 1,051,840.72 32 0.7513 234,485.35 33 NPV 34 35 NPV = Present Value of Cash Inflows Initial Investment 36 = $ 234,485.35 37 38 Solvent Preperg 39 40 PV of Cash Flows Cash Flows ($) 41 Year PV Factor -925,000.00 42 0 -925,000 1 43 1 565,000 0.9091 513,636.36 410,000 340,000 338,842.98 44 2 0.8264 0.7513 45 3 255,447.03 182,926.37 46 NPV 47 48 NPV = Present Value of Cash Inflows Initial Investment 49 | = $ 182,926.37 50 51 Based on NPV, Dry Prepreg should be selected 52 53 54. Sheet98 Discounted PBP .. 11:23 PM ENG 11/23/2019