Question

Quattro, Inc. has the following mutually exclusive projects available. The company has historically used a four-year cutoff for projects. The required return is 11 percent.

Year 0 Cash Flow (A) -$75,000 6,200 9,400 28, 100 32,600 Cash Flow(B) -$85,000 27,700 26,500 24,200 15,600 4

The payback for Project A is ____ while the payback for Project B is ____. The NPV for Project A is _____ while the NPV for Project B is ____. Which project, if any, should the company accept?

3.92 years; 3.64 years; $780.85; $1,211.48; accept both Projects

3.92 years; 3.79 years; -$17,108.60; $1,211.48; accept Project B only

3.96 years; 3.42 years; -$19,764.06; -$10,566.02; reject both projects

3.96 years; 3.42 years; $17,780.85; -$1,211.48; accept Project A only

4.06 years; 3.79 years; $211.60; -$7,945.93; accept Project A only

Answer 1

Project A
Year	Cash flow stream	Cumulative cash flow
0	-75000	-75000
1	6200	-68800
2	9400	-59400
3	28100	-31300
4	32600	1300
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
therefore by interpolation payback period = 3 + (0-(-31300))/(1300-(-31300))
3.96 Years
Project B
Year	Cash flow stream	Cumulative cash flow
0	-85000	-85000
1	27700	-57300
2	26500	-30800
3	24200	-6600
4	15600	9000
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
therefore by interpolation payback period = 3 + (0-(-6600))/(9000-(-6600))
3.42 Years
Project A
Discount rate	0.11
Year	0	1	2	3	4
Cash flow stream	-75000	6200	9400	28100	32600
Discounting factor	1	1.11	1.2321	1.367631	1.5180704
Discounted cash flows project	-75000	5585.586	7629.251	20546.48	21474.63
NPV = Sum of discounted cash flows
NPV Project A =	-19764.06
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Project B
Discount rate	0.11
Year	0.00%	1	2	3	4
Cash flow stream	-85000	27700	26500	24200	15600
Discounting factor	1	1.11	1.2321	1.367631	1.5180704
Discounted cash flows project	-85000	24954.95	21507.99	17694.83	10276.203
NPV = Sum of discounted cash flows
NPV Project B =	-10566.02
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

3.96 years: 3.42 years; -$19,764.06; -$10,566.02; reject both projects