Question

Lapides Ltd. is a small company that is currently analyzing capital expenditure proposals for the purchase of equipment. The capital budget is limited to $250,000, which Lapides believes is the maximum capital it can raise. The financial adviser is preparing an analysis of four projects that the company is considering, as follows:

Project A Project B Project C Project D Net initial investment: $200,000 $190,000 $250,000 $210,000 Projected cash inflows: Year 1 $50,000 $40,000 $75,000 $75,000 50,000 50,000 75,000 75,000 50,000 70,000 60,000 60,000 50,000 75,000 80,000 50,000 75,000 100,000 20,000

Instructions
a. Calculate the cash payback period for each of the four projects.
b. Calculate the net present value for each project at a cost of capital of 12%.
c. Which projects, if any, would you recommend funding, and why? Take into consideration all non-financial factors

Answer 1

Part a
		Project A		Project B		Project C		Project D
	Year	Net Annual Cashflows	Cumulative Net Annual Cashflows	Net Annual Cashflows	Cumulative Net Annual Cashflows	Net Annual Cashflows	Cumulative Net Annual Cashflows	Net Annual Cashflows	Cumulative Net Annual Cashflows
	1	$50,000	$50,000	$40,000	$40,000	$75,000	$75,000	$75,000	$75,000
	2	$50,000	$1,00,000	$50,000	$90,000	$75,000	$1,50,000	$75,000	$1,50,000
	3	$50,000	$1,50,000	$70,000	$1,60,000	$60,000	$2,10,000	$60,000	$2,10,000
	4	$50,000	$2,00,000	$75,000	$2,35,000	$80,000	$2,90,000	$40,000	$2,50,000
	5	$50,000	$2,50,000	$75,000	$3,10,000	$1,00,000	$3,90,000	$20,000	$2,70,000
		Payback Period =5 Years		Payback Period =4 Years + ($310,000-250,000)/$75,000		Payback Period =3 Years + ($290,000-250,000)/$80,000		Payback Period =4 Years
				Payback Period =4 Years + 0.80 =4.80 years		Payback Period =3 Years + 0.50 =3.50 years
Part b
	Project A			Project B			Project C			Project D
Year	Net Annual Cashflows	PVIF @12% for 5 years	PV of Net Cash Flows	Net Annual Cashflows	PVIF @12% for 3 years	PV of Net Cash Flows	Net Annual Cashflows	PVIF @12% for 3 years	PV of Net Cash Flows	Net Annual Cashflows	PVIF @12% for 3 years	PV of Net Cash Flows
1	$50,000	0.89286	$44,643	$40,000	0.89286	$35,714	$75,000	0.89286	$66,965	$75,000	0.89286	$66,965
2	$50,000	0.79719	$39,860	$50,000	0.79719	$39,860	$75,000	0.79719	$59,789	$75,000	0.79719	$59,789
3	$50,000	0.71178	$35,589	$70,000	0.71178	$49,825	$60,000	0.71178	$42,707	$60,000	0.71178	$42,707
4	$50,000	0.63552	$31,776	$75,000	0.63552	$47,664	$80,000	0.63552	$50,842	$40,000	0.63552	$25,421
5	$50,000	0.56473	$28,237	$75,000	0.56473	$42,355	$1,00,000	0.56473	$56,473	$20,000	0.56473	$11,295
Total PV of Net Cash Flows			$1,80,104			$2,15,417			$2,76,775			$2,06,176
Less:Initial Investment			$2,50,000			$2,50,000			$2,50,000			$2,50,000
NPV			-$69,896			-$34,583			$26,775			-$43,824
Part c	Project C is suggested as it has higher NPV among the three projects and also Payback period is less than the other 3 projects