Problem 71 Calculating Payback Period and NPV Tri Star Inc h

Problem 7-1 Calculating Payback Period and NPV

Tri Star, Inc., has the following mutually exclusive projects:

Calculate the payback period for each project. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Based on the payback period, which project should the company accept?

Project B

Project A

If the appropriate discount rate is 14 percent, what is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Based on the NPV, which project should the company accept?

Project B

Project A

Solution

Calculation of PAYBACK PERIOD

Payback period is nothing but time required to recover the initial cost.

PROJECT A

Payback period =1 year + (14200-8800)/7400

=1.73 years

PROJECT B

Payback period =2 years +(9600-4300-3800)/6200

=2.24

IN TERMS OF PAYBACK PERIOD , PROJECT A IS RECOMMENDABLE SINCE IT IS HAVING LESS PAYBACK PERIOD

Calculation of NPV

PROJECT A

NPV= Present value of cash flows – Initial investment

=[8800*PVF@14%,Year1]+[7400*PVF@14%,Year2]+[2100*PVF@14%,Year3] – 14200

=7719+5694+1418-14200

=$631

PROJECT B

NPV=[4300*PVF@14%Year1 ]+[3800*PVF@14%Year2]+[6200*PVF@14%Year3] -9600

=3772+2924+4185-9600

=$1281

IN TERMS OF NPV,PROJECT B IS RECOMMENDABLE SINCE IT HAVING HIGHER NPV