Question

Payback and NPV Neil Corporation has three projects under consideration. The cash flows for each of them are shown in the following table: D. The firm has a cost of capital of 16%. a. Calculate each project's payback period. Which project is preferred according to this method? b. Calculate each project's net present value (NPV). Which project is preferred according to this method? c. Comment on your findings in parts a and b, and recommend the best project. Explain your recommendation.

Answer 1

D9 - fx =SUM(D3:08) A BC 1 Project A 2 year C ash flows pv@16% Present value Cumulative Cash flows 1.0000 $ 40,000.00) $ (40,000.00) 1 $ 16,000.00 0.8621 $ 13,793.10 $ (24,000.00) 2 $ 16,000.00 0.7432 $ 11,890.61 $ (8,000.00) 3 $ 16,000.00 0.6407 $ 10,250.52 $ 8,000.00 4 $ 16,000.00 0.5523 $ 8,836.66 $ 24,000.00 5 $ 16,000.00 0.4761 $ 7,617.81 $ 40,000.00 NPV $ 12,388.70 Payback Period = 2+8000/16000 11 2.50 Years Project B year Cash flows pv@16% Present value Cumulative Cash flows 0 $ (40,000.00 1.0000 $ (40,000.00) $ 40,000.00) 11 $ 4,000.00 0.8621 $ 3,448.28 $ (36,000.00) 2 $ 10,000.00 0.7432 $ 7,431.63 $ (26,000.00) 3 $ 16,000.00 0.6407 $ 10,250.52 $ (10,000.00) 4 $ 22,000.00 0.5523 $ 12,150.40 $ 12,000.00 5 $ 28,000.00 0.4761 $ 13,331.16 $ 40,000.00 NPV $ 6,612.00 Payback Period = 3+10000/22000 3.45 Years 10 12 Accept Project C because of lower Payback period 15 Accept Project C because of higher NPV 13 Project C 14 year Cash flows pv@16% Present value Cumulative Cash flows 0 $ (40,000.00) 1.0000 $ (40,000.00) $ (40,000.00) 1 $ 28,000.00 0.8621 $ 24,137.93 $ (12,000.00) 2 $ 22,000.00 0.7432 $ 16,349.58 $ 10,000.00 3 $ 16,000.00 0.6407 $ 10,250.52$ 26,000.00 4 $ 10,000.00 0.5523 $ 5,522.91 $ 36,000.00 5$ 4,000.00 0.4761 $ 1,904.45 $ 40,000.00 NPV $ 18,165.40 Payback period = 1+12000/22000 1.55 Years Accept Project C because of higher NPV and Lower Payback Period.

fax =SUM(D3:08) в с H I J Project B year 1 Project A 2 year 30 4 1 5 2 6 3 Cash flows pv@16% -40000 16000 =C3/1.16 16000 =C4/1.16 16000 =C5/1.16 16000 =C6/1.16 16000 =C7/1.16 NPV Payback Period = Present value =B3*C3 =B4*C4 =B5*C5 =B6*C6 =B7*C7 =B8*08 =SUM(D3:08) 2+8000/16000 =2+8000/16000 Cumulative Cash flows =B3 =E3+B4 =E4+B5 =E5+B6 =E6+B7 1=E7+B8 Cash flows -40000 4000 10000 16000 22000 28000 pv@16% Present value Cumulative Cash flows =H3*13 =H3 =13/1.16 =H4*14 =K3+H4 =14/1.16 =H5*15 =K4+H5 =15/1.16 =H6*16 =K5+H6 =16/1.16 =H7*17 =K6+H7 =17/1.16 =H8*18 =K7+H8 NPV =SUM(13:18) 3+10000/22000 =3+10000/22000 Years 74 Payback Period Years 8 5 9 10 11 12 13 Project C 14 year 15 0 16 1 Accept Project C becau Accept Project C becau Cash flows pv@16% Present value Cumulative Cash flows -40000 =B15*C15 =B15 28000 =C15/1.16 =B16*C16 =E15+B16 22000 =C16/1.16 =B17*C17 =E16+B17 16000 =C17/1.16 =B18*C18 =E17+B18 10000 =C18/1.16 =B19*C19 =E18+B19 4000 =C19/1.16 =B20*C20 =E19+B20 NPV =SUM(D15:D20) Payback Period = 1+12000/22000 =1+12000/22000 Years Accept Project C becau Activate Windows