Question

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 13 percent Year Project FProject G -S127,000 197,000 44,000 59.000 86,000 116,000 131,000 64,000 46,000 56,000 51,000 46,000 a. Calculate the payback period for both projects. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Project F Project G years years b. Calculate the NPV for both projects. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Net present value Project F Project G c. Which project, if any, should the company accept?

Answer 1

(a)-Payback Period

Payback Period - Project F

Year	Cash Flows	Cumulative net Cash flow
0	-127000	-127000
1	64000	-63000
2	46000	-17000
3	56000	39000
4	51000	90000
5	46000	136000

Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 2 Year + ($17,000 / $56,000)

= 2 Year + 0.30 years

= 2.30 Years

“Payback Period - Project F = 2.30 Years”

Payback Period - Project G

Year	Cash Flows	Cumulative net Cash flow
0	-197000	-197000
1	44000	-153000
2	59000	-94000
3	86000	-8000
4	116000	108000
5	131000	239000

Payback Period = Years before full recover + (Unrecovered cash inflow at start of the year/cash flow during the year)

= 3 Year + ($8,000 / $116,000)

= 3 Year + 0.07 years

= 3.07 Years

“Payback Period - Project G = 3.07 Years”

(b)-Net Present Value

Net Present Value – Project F

Year	Annual Cash Flow	Present Value factor at 13%	Present Value of Cash Flow
1	64,000.00	0.88496	56,637.17
2	46,000.00	0.78315	36,024.75
3	56,000.00	0.69305	38,810.81
4	51,000.00	0.61332	31,279.26
5	46,000.00	0.54276	24,966.96
TOTAL			$1,87,718.94

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $1,87,718.94 - $127,000

= $60,718.94

“Net Present Value – Project F = $60,718.94”

Net Present Value – Project G

Year	Annual Cash Flow	Present Value factor at 13%	Present Value of Cash Flow
1	44000	0.88496	38,938.05
2	59000	0.78315	46,205.65
3	86000	0.69305	59,602.31
4	116000	0.61332	71,144.97
5	131000	0.54276	71,101.55
TOTAL			$2,86,992.55

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $2,86,992.55 - $197,000

= $89,992.55

“Net Present Value – Project G = $89,992.55”

(c)-DECISION

“The Project G” is better in terms of Net Present Value method, Since it has the higher NPV of $89,992.55”