Question

Calculating Payback Perlod and NPV Tri Star, Inc., has the following mutually exclusive projects. YEAR PROJECT AT PROJECT B -$15,300 w No 8,700 -$10,700 5,300 4,300 4,800 7,400 3,100 a. Suppose the company's payback period cutoff is two years. Which of these two projects should be chosen? b. Suppose the company uses the NPV rule to rank these two projects. Which project should be chosen if the appropriate discount rate is 15 percent?

Answer 1

Payback period cutoff is 2 years;

So we will directly check for 2 years cashflow (if the sum is positive, the project can be taken up)

A = -15,300 + 8,700 + 7,400 = $800

B = -10,700 + 5,300 + 4,300 = -$1,300

Therefore, project A should be chosen by this method

From NPV perspective,

Year	Project A	Project B	PV of CF for Project A	PV of CF for Project B
0	-15,300.00	-10,700.00	-15,300.00	-10,700.00
1	8,700.00	5,300.00	7,565.22	4,608.70
2	7,400.00	4,300.00	5,595.46	3,251.42
3	3,100.00	4,800.00	2,038.30	3,156.08
		NPV	-101.02	316.19

Therefore, project B should be chosen by this method

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