Question

a. Project A costs $5,500 and will generate annual after-tax net cash inflows of $2,600 for 5 years. What is the payback period for this investment under the assumption that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.)

b. Project B costs $5,500 and will generate after-tax cash inflows of $660 in year 1, $1,400 in year 2, $2,400 in year 3, $2,700 in year 4, and $2,400 in year 5. What is the payback period (in years) for this investment assuming that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.)
Answer each independent question, (a) through (e), below. a. Project A costs $5,500 and will generate annual after-tax net cash inflows of $2,600 for 5 years. What is the payback period for this investment under the assumption that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.) b. Project B costs $5,500 and will generate after-tax cash inflows of $660 in year 1, $1,400 in year 2, $2,400 in year 3, $2,700 in year 4, and $2,400 in year 5. What is the payback period (in years) for this investment assuming that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.) c. Project C costs $5,500 and will generate net cash inflows of $3,000 before taxes for 5 years. The firm uses straight-line depreciation with no salvage value and is subject to a 30% tax rate. What is the payback period under the assumption that all cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.) d. Project D costs $5,500 and will generate sales of $4,400 each year for 5 years. The cash expenditures will be $1,700 per year. The firm uses straight-line depreciation with an estimated salvage value of $700 and has a tax rate of 30%. (1) What is the accounting (book) rate of return based on the original investment? (Round your answer to 2 decimal places.) (2) What is the book rate of return based on the average book value? (Round your answer to 2 decimal places.) Use the built-in NPV function in Excel to calculate the amounts for projects a through d. (Round your answers to the nearest whole dollar amount.) e1. What is the NPV of project A? Assume that the firm requires a minimum after-tax return of 7% on investment. e2. What is the NPV of project B? Assume that the firm requires a minimum after-tax return of 7% on investment. e3. What is the NPV of project C? Assume that the firm requires a minimum after-tax return of 7% on investment. e4. What is the NPV of project D? Assume that the firm requires a minimum after-tax return of 7% on investment. years a. b. years years Payback period Payback period Payback period Book rate of return Book rate of return NPV of Project A NPV of Project B NPV of Project C NPV of Project D 14.

Answer 1

The solution for the above question has been given in two parts a. containing solution for Project A and b. containing solution for Project B in the two pictures below:

a. Page 1 cson Project A 1.200 002,2 lo wollen Cash Outflow = $5,500 Ner Cash inflows - $ 27600 for 5 years. where, the ner cash inflows is even throughout the 5 years, Pay-back period a Toral Cash Outflow Net Cash Inflow p.a. $5,500 $ 2,600 - 002 212 years (rounded off b. Project B - $ 5,500 DS Cash Ourflow Cash Inflows Years Cash Inflows & Cumulative Cash Inflows $660 $1400 $ 2400 $ 2,700 $ 2,400 $ 660 $2,060 $4,460 $7,160 $ 9,560 →$ 5,500 5

Page 2 The cash outflow of $5,500 lies between year 3 and Year 4. Pag-back period : 3 years + To calculate lay back period using Interpolation, Cash Inflows Cumulative $ 4460 $7,160 $ 2700 for $ 1,040 |$5,500 $4,460 .. 7:0:39 (rounded obb k period : 3 years & and Period between year 4 Year 3 (a 3+ 0.39 ---39 years Answer: Pay-back period for Project - Project A is 2 12 years B is 3.39 years and

Answer: Pay-back Period for Project A is 2.12 years and for Project B is 3.39 years.