Question

Short problem-solving questions (5 pts per question) Capital expenditure data for Project A Initial Investment Expected Cash Inflow:s Year 1 Year 2 Year 3 Year Year 5 $3,000 S5,000 $5,000 $2,000 $2,000 $15,000 (1) Calculate payback period for Project A (2) If the cash inflow in Year 4 were S5,000 instead of $2,000, calculate the payback period. 3 Investment A will generate S 150,000 (DCE)) our years rom now and investment B will generate $120 000 ive years rom now. Ifthe cost of capital is 20% which investment is better? using discounted cash flows

Answer 1

Given Now until 4^th year investment is regained. payback period = 4 years. (b) Let assume 5000 is distributed throughout the year evenly now 2000 required for regaining investment 5000/200 = 5/2 12^6 times 5/2 = 30 months payback period = 3 years + 30 months. (c) NPV = x/(1 + R)^n NPV 0 + A = 150,000/(1, 0.20)^2 = 150,000/(1.20)^2 = $ 104166.66 NPV of B = 120,000/(1 + 0.20)^3 = $ 69444.44 By calculating NPV of A is move Hence A is better.