Question

e d t All techniques, conflicting rankings Nicholson on M pa t and has cost of 130.000 The 's board of the o ndg shows a ch shown in the the th e . Catulate the paxtack period for each project Rand the projects by payback period. Cat NPV och pratar the proct by NPV Ca thedreach project and the pretty d. Make a recommendation a. The payback period of project in years (Pound to two decimal places

Answer 1

Payback Method:

Project A

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

                           = 3 years + ($130,000 - $120,000)/$40,000

                           = 3 years + $10,000/ $40,000

                           = 3 years + 0.25

                           = 3.25 years.

Project A

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

                         

                             = 1 year + ($130,000 - $85,000)/$20,000

                             = 1 year + $45,000/ $70,000)

                             = 1 year + 0.6429

                             = 1.64 years.    

Ranking of projects by payback method:

1. Project B
2. Project A

b.Project A

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$130,000. It is entered has a negative value since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the cost of capital of 8%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 8% cost of capital is $54,915.19.

Project B

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$130,000. It is entered has a negative value since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the cost of capital of 8%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 8% cost of capital is $65,509.72. 31.27%

Ranking of projects by the net present value method:

1. Project B
2. Project A

c. Project A

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$130,000. It is entered with 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 and CPT button to get the IRR of the project.

The IRR of project is 20.93%.

Project B

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$130,000. It is entered with 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 and CPT button to get the IRR of the project.

The IRR of project is 31.27%.

Ranking of projects by the internal rate of return method:

1.Project B

2. Project A

I would recommend to accept project B since it has the highest net present value.

In case of any query, kindly comment on the solution.