Question

his uuestions 2 of 31 (0 completely Projects A and B of equal to area tomatives for expanding Lea Company's capacity The firm's cost of capital is 15%. The cash flows for each project are shown in the following table a. Calculate each project's payback period b. Calculate the representate (NPV) for each project c. Indicate which project you would recommend a. The payback period of project Als years. (Round to two decimal places) The payback period of project Bis years. (Round to two decimal places) The NPV of project Ass (Round to the newest cent) The NPV of project Biss Round to the nearest cert) . Select the best answer below Which project will you recommend O A Project A OB Project

Answer 1

a.

Project A:

Cost = 60000

In 3 years this project will generate 45000.

Remaining amount to recover = 60000 - 45000 = 15000

Time required to recover remaining amount = 15000 / 25000 = 0.6

Payback Period = 3 + 0.6 = 3.6 years Answer

Project B:

Cost = 30000

In 3 years this project will generate 30000 which equals cost.

Hence payback period = 3 years Answer

b.

Project A:

NPV = Present value of all future cash inflow - initial outlay

NPV = 10000/(1+0.15)^1 + 15000/(1+0.15)^2 + 20000/(1+0.15)^3 + 25000/(1+0.15)^4 + 30000/(1+0.15)^5 - 60000

NPV = $2397.27 Answer

Project B:

NPV = 10000/(1+0.15)^1 + 10000/(1+0.15)^2 + 10000/(1+0.15)^3 + 10000/(1+0.15)^4 + 10000/(1+0.15)^5 - 30000

NPV = $3521.55 Answer

c.

The NPV of Project B is higher, hence we will recommend project B.

Please let me know in case you have any queries and I will be happy to assist you.