Question

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Tri Star, Inc., has the following mutually exclusive projects:

Year	Project A				Project B
0	–$	14,300			–$	9,700
1		8,900				4,400
2		7,500				3,900
3		2,100				6,300

Calculate the payback period for each project. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

	Payback Period
Project A	years
Project B	years

Based on the payback period, which project should the company accept?

• Project B

• Project A

If the appropriate discount rate is 15 percent, what is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

	NPV
Project A	$
Project B	$

Based on the NPV, which project should the company accept?

Answer 1

The correct answer is :

Payback Period
Project A	1.72 years
Project B	2.22 years

Since Project A has a lower payback period, it is accepted based on the payback period method.

Note:

Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

Project A :

= 1 + (5400 / 7500)

= 1.72 Years

Year	Investment	Cash Inflow	Net Cash Flow
0	-14,300	-	-14,300	(Investment + Cash Inflow)
1	-	8,900	-5,400	(Net Cash Flow + Cash Inflow)
2	-	7,500	2,100	(Net Cash Flow + Cash Inflow)
3	-	2,100	4,200	(Net Cash Flow + Cash Inflow)

Project B:

= 2 +(1400 / 6300)

= 2.22 Years

Year	Investment	Cash Inflow	Net Cash Flow
0	-9,700	-	-9,700	(Investment + Cash Inflow)
1	-	4,400	-5,300	(Net Cash Flow + Cash Inflow)
2	-	3,900	-1,400	(Net Cash Flow + Cash Inflow)
3	-	6,300	4,900	(Net Cash Flow + Cash Inflow)

-----------------

The correct answer is :

	NPV
Project A	$ 490.99
Project B	$ 1,217.40

Since the NPV of Project B is higher, Project B must be accepted.

Note:

Net Present Value = Present Value of Cash Inflows - Present Value of Cash Outflows

Project A :

NPV = [ $ 8900 * 1/(1.15) ^ 1 + 7500* 1/(1.15) ^2 + 2100* 1/(1.15) ^3] -$ 14300

= $ 490.99

Project B :

NPV = [ $ 4400 * 1/(1.15) ^ 1 + 3900* 1/(1.15) ^2 + 6300* 1/(1.15) ^3] -$ 9700

= $ 1,217.40