Secure I httpswwwmathxlcomStudentPlayerHomeworkaspxhomeworkl

Secure I https://www.mathxl.com/Student/PlayerHomework.aspx?homeworkld-46., a FINA2230 BUSINESS FINANCE WINTER 2017 Homework: Chapter 10 Score: 0 of 1 pt P10-12 (similar to) Save 6 of 13 (3 complete) HW Score: 19.87%, 2.58. Question Help * Payback and NPV Neil Corporation has three projects under consideration. The cash flows for each of them are shown in the following table. The firm has a cost of capital of 17% a. Calculate each projects payback period. Which project is preferred according to this method? c. Comment on your findings in parts a and b, and recommend the best project. Explain your b. Calculate each project\'s net present value (NPV). Which project is preferred according to this method? recommendation. a. Th Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet) Project A Project B Project C Initial investment (CFo) $50,000 S50 $50,000 Year (0)Cash inflows (CF $18,000 $18,000 S18,000 $18,000 $2,000 $10,000 $18,000 $26,000 $18,000$34000 S34000 S26,000 $18,000 $10,000 $2.000 Enter y Print Done 8 remaining 9:45 PM 1/8/2018

Solution

a)   Calculation of Payback period of each project   (Amount in $)

Payback period of Project A will be between 2 and 3 years as its cumulative cash flow become positive in Year 3.

Payback period Project A = 2 years + (14,000/18,000) years = 2 years + 0.78 years = 2.78 years

Payback period of Project B will be between 3 and 4 years as its cumulative cash flow become positive in Year 4.

Payback period Project B = 3 years + (20,000/26,000) years = 3 years + 0.77 years = 3.77 years

Payback period of Project C will be between 1 and 2 years as its cumulative cash flow become positive in Year 2.

Payback period Project C = 1 years + (16,000/26,000) years = 1 year + 0.62 years = 1.62 years

b) Calculation of Net present value of each project (Amount in $)

The NPV is highest in Project C.

c) The payback period is lesser for Project C (i.e. 1.62 years) from projects A and B as calculated in part a. The NPV is also highest for Project C (i.e. $15,560) from projects A and B as calculated in part b. This is because the initial investment and project life of all the projects are same but the annual cash inflows of each project is different. Project C has more cash inflows in the earlier years and less cash inflows in the last years of project life. Therefore based on both the criterias, Project C should be the best project.

Year	Project A Cash flows	Project A Cumulative Cash flows	Project B Cash flows	Project B Cumulative Cash flows	Project C Cash flows	Project C Cumulative Cash flows
0	(50,000)	(50,000)	(50,000)	(50,000)	(50,000)	(50,000)
1	18,000	(32,000)	2,000	(48,000)	34,000	(16,000)
2	18,000	(14,000)	10,000	(38,000)	26,000	10,000
3	18,000	4,000	18,000	(20,000)	18,000	28,000
4	18,000	22,000	26,000	6,000	10,000	38,000
5	18,000	40,000	34,000	40,000	2,000	40,000