Fin622 assignment # 2 solution
Wednesday, May 12, 2010 Posted In Fin Edit ThisSemester “Spring 2010” |
“Corporate Finance (Fin622)” Assignment No. 1 Marks: 20 |
Q.1: Calculate the payback period of each project.
For Project A
Year | 0 | 1 | 2 | 3 | 4 |
Project A | -57,000 | 20,000 | 20,000 | 20,000 | 20,000 |
The formula of Payback period is,
PP=Io/Ct
PP=57,000/20,000
PP=2.85years
For Project B
Year | 0 | 1 | 2 | 3 | 4 |
Project B | -54000 | 22,000 | 20,000 | 18,000 | 16,000 |
Payback period is lies between year 2 and year 3 .Sum of money recovered by the end of the second year
= (22,000+20,000)
= 42,000
=54,000 – 42000
= 12,000
PP= (2+12,000/18,000)
PP=2.67years
Q.2: Calculate the Net present value (NPV) of each project.
For Project A
Year | 0 | 1 | 2 | 3 | 4 |
Project A | -57,000 | 20,000 | 20,000 | 20,000 | 20,000 |
NPV=Cf [(1/i-1/i (1+i)]-Ct
NPV=20,000[(1/.14 - 1/.14 (1+.14) ^4)]-57,000
NPV=20,000[(7.1429 – 1/ 0.2365)] – 57,000
NPV=20,000 (7.1429 – 4.2283) – 57,000
NPV= 20,000 *(2.9146) – 57000
NPV=58291 – 57,000
NPV=1291
For Project B
Year | 0 | 1 | 2 | 3 | 4 |
Project B | -54000 | 22,000 | 20,000 | 18,000 | 16,000 |
NPV= [Cf1/ (1+i) + Cf2/ (1+i) ^2+ Cf3/ (1+i) ^3+ Cf4/ (1+i) ^4] -Ct
NPV= [22,000 / (1+.14) +20,000/ (1+.14) ^2+18,000/ (1+.14) ^3+16,000 / (1+.14) ^4] - 54000
NPV=19298+15389+12150+9473-54000
NPV=56310 – 54000
NPV=2310
Q.3: On the basis of results of pay back period and NPV, which project would you recommend to your company and why?
As per the Calculation According to the Payback Period method we should have to take Project B Because it has less payback time as compare to Project A.
As far as the NPV is concern the both the projects is NPV > 0, so both Project could be possible to take , but the Project are Mutually exclusive then we should take the project that has the Greater NPV so that is the Project B.
