Project 1 Project 2 Project 3 Initial Investment Cost of Capital Target Payback

Question

Project 1 Project 2 Project 3 Initial Investment Cost of Capital Target Payback Period 125,000.00 S 140,000.00 S 10% 4 years 4 years 4 years Cash Flow Project 1 Cum CF Diacounted CF Project2 Cum. CF Dsccunted CF Cum, CF Project 3 Cum. CF Dlscounted CF Initial Investment S(125,000) 125,000) (125,000) $(125,000) $(140.000) $(140,000) S (140,000) S(140,000) S (148,000) S (148,000) S (148,000) $(148,000) Year 1 S 30,000 (95,000) 27,523 $(97477) 40,000 $ (100,000) s 37,383 S (102,617) S 36,00o (112,000) 32,727 $ 115,273) Year 2 S 30,000 $ (65,000)"$ 25,250 $ (72.227) $ 40,000 $ (60,000)-S 34,938 S (67,679) S 36,000 S (76,000)'s 29,752 $ (85,521) Year 3 S 35,000 $(30,000)$ 27,026$(45,200) 30,000 S Year 4S 35,000 $ 5,000's 24,795 $ (20,405) $ 30,000 $ Year 5 S 35,000 $ 40,000 $22,748 000)S 24,489 S (43,190) S 36,000 S (40,000) S 27,047 $ (58,473) - S 22,887 S (20,303) S46,000 S 6,000 31,419$ (27,055) 2,342 $ 30,000 30,000 S 21,390 S 1,086 S 46,000 S 52,000 28,562 $ Project 1 ect 2 Project 3 Which projectts) should be accepted? Payback Period Discounted Payback NPV 3.88 4.90 4.95 1507.67 10 .38% 1.01 4.95 Accept, Accept, Accept 9.7% 1.02 7.31% 1.01

Explanation / Answer

In the above formula,
A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A

so for project 2 Payback period = 3 + (30000/30000) = 3+1 = 4

for project 3, payback period = 3+(40000/46000) = 3.87

Payback Period = A + B C

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