Question

Please include formulas

Problem 8-21 NPV and Payback Period [LO 1, 4] Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 11 percent. Year WN Project F -$ 144,000 55,500 54,500 64,500 59,500 54,500 Project G -$ 214,000 35,500 50.500 94,500 124,500 139,500 Required: (a) Calculate the payback period for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Payback period years Project F Project G years (b) Calculate the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Net present value Project F Project G (c) Which project should the company accept? (Click to select)

Answer 1

a
Project F
Year	Cash flow stream	Cumulative cash flow
0	-144000	-144000
1	55500	-88500
2	54500	-34000
3	64500	30500
4	59500	90000
5	54500	144500
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 2 and 3
therefore by interpolation payback period = 2 + (0-(-34000))/(30500-(-34000))
2.53 Years
Accept project as payback period is less than 3 years
Project G
Year	Cash flow stream	Cumulative cash flow
0	-214000	-214000
1	35500	-178500
2	50500	-128000
3	94500	-33500
4	124500	91000
5	139500	230500
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
therefore by interpolation payback period = 3 + (0-(-33500))/(91000-(-33500))
3.27 Years
Reject project as payback period is more than 3 years
b
Project F
Discount rate	0.11
Year	0	1	2	3	4	5
Cash flow stream	-144000	55500	54500	64500	59500	54500
Discounting factor	1	1.11	1.2321	1.367631	1.5180704	1.685058
Discounted cash flows project	-144000	50000	44233.42	47161.84	39194.493	32343.1
NPV = Sum of discounted cash flows
NPV Project F =	68932.86
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Project G
Discount rate	0.11
Year	0	1	2	3	4	5
Cash flow stream	-214000	35500	50500	94500	124500	139500
Discounting factor	1	1.11	1.2321	1.367631	1.5180704	1.685058
Discounted cash flows project	-214000	31981.98	40986.93	69097.59	82012.006	82786.46
NPV = Sum of discounted cash flows
NPV Project G =	92864.97
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

c

Accept project F as payback is within the cutoff