Fin622 Solution
Tuesday, May 11, 2010 Posted In Fin Edit This
1) The payback period of each project
THE PAYBACK PERIOD (PP); For the Project A that has equal receipts
= Initial Investment / Cash Flow (I0/Ct)
= 57000/20000
= 2.85year
THE PAYBACK PERIOD (PP); *For the Project B
Payback period lie between 2nd year and 3rd year
Sum of the money recovered by the end of second year
= (22000+20000)
= 42000
Sum of money recovered by the end of 3rd year
= (54000 – 42000)
= 12000
= [2+ 12000/18000) years
= 2.667* years
2) The Net present value (NPV) of each project.
NPV for project A;
Formula:
(CFn * PVFA at 14% for 4 years) – Initial Investment
PVFA at 14% for 4 years:
= [1/ (1+i) ^ n + 1/ (1+i) ^ n + 1/ (1+i) ^ n + 1/ (1+i) ^ n]
= [1/ (1+0.14) ^1 + 1/ (1+0.14) ^2 + 1/ (1+0.14) ^3 + 1/ (1+0.14) ^4]
= [0.8772 + 0.7695 + 0.6749 + 0.5920]
= [2.9136]
By putting values in Formula:
= (20000 * 2.9136) – 57000
= 1272
NPV for project B;
Formula:
Sum of the NPV (CFn) – Initial investment
Sum of the NPV (CFn)
= [CF1/ (1+i) ^ n + CF2/ (1+i) ^ n + CF3/ (1+i) ^ n + CF4/ (1+i) ^ n]
= [22000/ (1+0.14) ^1 + 20000/ (1+0.14) ^2 + 18000/ (1+0.14) ^3 + 16000/
(1+0.14) ^4]
= 19298.246 + 15389.352 + 12149.487 + 9473.284
= 56310.368
By putting values
= 56310.368 – 54000
= 2310.368
3) Decision
NPV
Project A
1272.00
Project B
2310.368
According to the NPV of both projects, I will recommend project B due to
greater NPV of project B from A.
PP
Project A
2.85 year
Project B
2.667 year
According to the PP of both projects, I will also recommend Project B,
because in Project B the payback period (PP) is little than Project A.
THE PAYBACK PERIOD (PP); For the Project A that has equal receipts
= Initial Investment / Cash Flow (I0/Ct)
= 57000/20000
= 2.85year
THE PAYBACK PERIOD (PP); *For the Project B
Payback period lie between 2nd year and 3rd year
Sum of the money recovered by the end of second year
= (22000+20000)
= 42000
Sum of money recovered by the end of 3rd year
= (54000 – 42000)
= 12000
= [2+ 12000/18000) years
= 2.667* years
2) The Net present value (NPV) of each project.
NPV for project A;
Formula:
(CFn * PVFA at 14% for 4 years) – Initial Investment
PVFA at 14% for 4 years:
= [1/ (1+i) ^ n + 1/ (1+i) ^ n + 1/ (1+i) ^ n + 1/ (1+i) ^ n]
= [1/ (1+0.14) ^1 + 1/ (1+0.14) ^2 + 1/ (1+0.14) ^3 + 1/ (1+0.14) ^4]
= [0.8772 + 0.7695 + 0.6749 + 0.5920]
= [2.9136]
By putting values in Formula:
= (20000 * 2.9136) – 57000
= 1272
NPV for project B;
Formula:
Sum of the NPV (CFn) – Initial investment
Sum of the NPV (CFn)
= [CF1/ (1+i) ^ n + CF2/ (1+i) ^ n + CF3/ (1+i) ^ n + CF4/ (1+i) ^ n]
= [22000/ (1+0.14) ^1 + 20000/ (1+0.14) ^2 + 18000/ (1+0.14) ^3 + 16000/
(1+0.14) ^4]
= 19298.246 + 15389.352 + 12149.487 + 9473.284
= 56310.368
By putting values
= 56310.368 – 54000
= 2310.368
3) Decision
NPV
Project A
1272.00
Project B
2310.368
According to the NPV of both projects, I will recommend project B due to
greater NPV of project B from A.
PP
Project A
2.85 year
Project B
2.667 year
According to the PP of both projects, I will also recommend Project B,
because in Project B the payback period (PP) is little than Project A.
