Nicholson Roofind Materials Inc is considering two mutually exlusive projects, e

Question

Nicholson Roofind Materials Inc is considering two mutually exlusive projects, each with an initial investment of $160,000. The company's board of directors has set a 4 year payback requierement and has set its cost of capital at 7%. The cash inflows associated with the two projects are shown in the following table:

Cash INflows

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 proejct. Rank the project by IRR

d. Make a recommendation

Year Project A Project B 1 $50,000 $85,000 2 $50,000 $50,000 3 $50,000 $40,000 4 $50,000 $40,000 5 $50,000 $40,000 6 $50,000 $40,000

Explanation / Answer

a ) Payback period for project A =time in which the cashflows would be equal to initial investment

lets add each year cashflows = 50000 + 50000 + 50000+ 10000(year 4)

= 150000 + 10000/50000

=3.2 years

Payaback period for project B =85000 +50000 +25000/150000

= 2.16 years

2)

NPV is positive for each prject it is the present value of the cashflows discunted at rate of 7%

3)

Bot projects have irr above cost of capital hence both should be accepted

As project A adds more value it ahould be accepted

-160000 50000 50000 50000 50000 50000 50000 NPV 73,202.79 -160000 85000 40000 40000 40000 40000 40000 NPV 67,960.43

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