29. You are cash inflows of $46,000, 579,000, and $51 ,000 for years 1 to 3,resp

Question

29. You are cash inflows of $46,000, 579,000, and $51 ,000 for years 1 to 3,respesivey S135,000 with expected cash inflows for years 1 to 3 of $50.000,3weas derial respectively. The required return fot both projects is 16 percent 000, and $1 on IR.R you hend a. Accept Project B and reject Project A b. Reject both projects c. Accept both projects. ect Project A.-… percent Bied C,Accept both projects Project A and reject Project B e. Accept either one of the projects, but not both Answer project has an initial cost of s6,700. The cas in4100,52.400,53.300,wed over the next four years, respectively. What is the puyback period a. 1.94 years b. 2.06 years c. 2.51 years d. 3.31 years e. 3.73 years Answer:

Explanation / Answer

29) Let us calculate Net Present Value (NPV) of two independent projects - Project A and Project B

DF - Discounting Factor = IRR = 16%

DCF - Discounted Cash Flows

Project A

Year

(Col. 1)

Cash Inflows (in $)

(Col. 2)

DF @ 16%

(Col. 3)

DCF(in $)

(Col. 4) = (Col.2) X (Col. 3)

Formula - NPV = (Total of cash inflows from year 1 to 3) - (Initial Cost)

= (39,656.60 + 58,712.80 + 32,675.70) - (125,000)

= 131,045.10 - 125,000

NPV = 6,045.10

Net Present Value (NPV) of Project A = 6,045.10 is greater than 0 (i.e. positive)

Project B

Year

(Col. 1)

Cash Inflows (in $)

(Col. 2)

DF @ 16%

(Col. 3)

DCF(in $)

(Col. 4) = (Col.2) X (Col. 3)

Formula - NPV = (Total of cash inflows from year 1 to 3) - (Initial Cost)

= (43,105 + 22,296 + 64,070) - (135,000)

= 129,471 - 135,000

NPV = (5,529)

Net Present Value (NPV) of Project B = (5,529) is less than 0 (i.e. negative)

Analysis -

NPV is greater than 0 (i.e. positive) means increase in value of Project. So, the project which gives positive NPV is accepted and the project which gives negative NPV is rejected.

Decision -

Based on IRR,

d. Accept Project A and Reject Project B

30) Let us calculate Pay back period for the project

Initial Investment = $6,700

Note - From the above table it is clear that in the first 2 years $6,500 out of $6,700 are recovered and in the 3rd year another $9,800 are recovered. This means that the pay-back period is more than 2 years but less than 3 years.

Pay-back Period is calculated as under -

Pay-back Period = 2 + [(6,700 - 6,500) / (9,800 - 6,500)] X (3rd year - 2nd year)

= 2 + [200 / 3,300] X (1)

= 2 + 0.06

Pay-back Period = 2.06 years

Answer - b. 2.06 years

Year

(Col. 1)

Cash Inflows (in $)

(Col. 2)

DF @ 16%

(Col. 3)

DCF(in $)

(Col. 4) = (Col.2) X (Col. 3)

1 46,000 0.8621 39,656.60 2 79,000 0.7432 58,712.80 3 51,000 0.6407 32,675.70

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