Answer a)
We will be finding the cumulative cashflows over years.
Project A | ||
Initial Investment | 7,200 | |
year | Cashflow | Cumulative Cashflow |
1 | 2,200 | 2,200 |
2 | 2,600 | 4,800 (2200 + 2600) |
3 | 2,600 | 7,400 (4800 + 2600) |
4 | 2,100 | 9,500 |
5 | 1,900 | 11,400 |
So in year 2 we get $ 4800 money back of the invested money $ 7200
So remaining money (7200 - 4800 ) = $ 2400 needs to retrieved from year 3.
Now, in year 3 we are earning $ 2600
Hence, to earn $ 2400, it will take = $ 2400 / 2600 = 0.92 Years
Hence, total payback period = Year 2 + 0.92 (Year 3) = 2.92 Years
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Answer b)
Project B | ||
Initial Investment | 7,200 | |
year | Cashflow | Cumulative Cashflow |
1 | 1,300 | 1,300 |
2 | 1,300 | 2,600 (1300 + 1300) |
3 | 1,300 | 3,900 (2600 + 1300) |
4 | 3,700 | 7,600 (3900 + 3700) |
5 | 4,100 | 11,700 |
So in year 3 we get $ 3900 money back of the invested money $ 7200
So remaining money (7200 - 3900 ) = $ 3300 needs to retrieved from year 4.
Now, in year 4 we are earning $ 3700
Hence, to earn $ 3300, it will take = $ 3300 / 3700 = 0.89 Years
Hence, total payback period = Year 3 + 0.38 (Year 4) = 3.89 Years
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Answer c) Using Payback Method since Project A return money quickly (low payback period), we should choose Project A
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Answer d) I don't see any problem with the decision as the IRR of Project A > Project B.
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Can you please show the steps of how to solve (in excel
preferred) please, thank you!
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