4. All techniques, conflicting rankings Nicholson Roofing Materials, Inc., is co

Question

4. All techniques, conflicting rankings Nicholson Roofing Materials, Inc., is considering Chapter each with an initial investment of $160,000. The company's board of directors has set a 4-year payback requireme has set its cost of capital at 9%. The cash inflows associated with the two projects two mutually exclusive projects nt and are shown in the following table: a. Calculate the payback period for each project. Rank the projects by payback period. b. Calculate the NPV of each project. Rank the project by NPV. c. Calculate the IRR of each project. Rank the project by IRR d. Make a recommendation. a. The payback period of project A is years. (Round to two decimal places.) of project B is_ years. (Round to two decimal places.) According to the payback method, which project should the firm choose? (Select the best answer below.) O A. Project B O B. Project A b. The NPV of project A is $ The NPV of project B is $ According to the NPV method, which project should the firm choose? (Select the best answer below.) O A. Project B . (Round to the nearest cent.) (Round to the nearest cent.) O B. Project A c. The IRR of project A is The IRR of project B is According to the IRR method, which project should the firm choose? (Select the best answer below.) OA, Project B %, (Round to two decimal places.) %. (Round to two decimal places.) O B. Project A d. Which project will you recommend? (Select the best answer below.) O Project A O Project B 2: Data Table (Click on the icon located on the top-right comer of the data table below in order to copy its contents into a spreadsheet.) Cash Inflows (CF) Project A $50,000 S $50,000 $50,000 $50,000 $50,000 $50,000 Project B $65,000 $50,000 $40,000 $40,000 $40,000 $40,000 Year

Explanation / Answer

Answer-4:

a) Payback Period:

Project: A, since the cash inflow from project A is constant throughout its entire life, payback period can be calculated using following formula:

= Total Initial Investment / Annual Cash Inflow

= 160,000 / 50,000 = 3.2 years

Project: B, as the cash inflow from project b is not constant throughout its life, payback period can be calculated using cumulative cash flow

Year

Annual Cash Inflow

Cumulative Cash Inflow

1

65000

65000

2

50000

115000

3

40000

155000

4

40000

195000

5

40000

235000

6

40000

275000

The table shows that payback period shall lie between 3 to 4 years. As up to 3 years sum of $ 155,000 will be recovered and rest $ 5,000 shall be recovered in 4th year:

= 5,000/40,000 = 1/8 years or 0.125 years

Payback period = 3 + 0.125 = 3.125 years

As per payback period method firm should choose Project B because its payback period is less as compare to project A.

b) Net Present Value:

= Present Value of Cash Inflows – Present Value of Cash Outflows

Discount Rate is 9%, using excel for calculations

Project: A

= 224,295.93 – 160,000 = $ 64,295.93

Project: B

= 210,789.32 – 160,000 = $ 50,789.32

As per NPV method, company should select Project A because its npv is greater than project B.

c) Internal Rate of Return:

Using excel for calculations:

Project A = 21.57%

Project B = 20.22 %

As per IRR method, company should choose project A because its IRR is greater than project B.

d) Choosing the Project A is best. It add more value with similar investment as required by project B.

PLEASE, Rate the solution if it's helpful to you ...

Year

Annual Cash Inflow

Cumulative Cash Inflow

1

65000

65000

2

50000

115000

3

40000

155000

4

40000

195000

5

40000

235000

6

40000

275000

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.