Kaleb Konstruction, Inc., has the following mutually exclusive projects availabl
ID: 2737400 • Letter: K
Question
Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 10 percent.
Calculate the payback period for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Calculate the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 10 percent.
Explanation / Answer
Project F
Year
Annual Cash Flow
Cumulative Cash Flow
Year 0
(130,000)
Year 1
62,500
62,500
Year 2
47,500
110,000
Year 3
57,500
167,500
Year 4
52,500
Year 5
47,500
Payback period = 2 Years + (130,000 – 110,000)/57,500
Pay back period = 2.34 Years
NPV = -130,000 + 62,500/1.10 + 47 ,500/1.10^2 + 57,500/1.10^3 + 52,500/1.10^4 + 47,500/1.10^5
NPV = $74,626.9
Project G
Year
Annual Cash Flow
Cumulative Cash Flow
Year 0
(200,000)
Year 1
42,500
42,500
Year 2
57,500
100,000
Year 3
87,500
187,500
Year 4
117,500
Year 5
132,500
Payback period = 3 Years + (200,000 – 187,500)/117,500
Pay back period = 3.11 Years
NPV = -200,000 + 42,500/1.10 + 57 ,500/1.10^2 + 87,500/1.10^3 + 117,500/1.10^4 + 132,500/1.10^5
NPV = $114,423.23
Answer (c).
The Project G should be accepted, as the NPV of the Project G is greater than Project F. The decision will be based on NPV method, as it consider the time value of the money.
Year
Annual Cash Flow
Cumulative Cash Flow
Year 0
(130,000)
Year 1
62,500
62,500
Year 2
47,500
110,000
Year 3
57,500
167,500
Year 4
52,500
Year 5
47,500
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