Fin622 Solution

1) The payback period of each project



THE PAYBACK PERIOD (PP); For the Project A that has equal receipts



= Initial Investment / Cash Flow (I0/Ct)

= 57000/20000

= 2.85year



THE PAYBACK PERIOD (PP); *For the Project B



Payback period lie between 2nd year and 3rd year

Sum of the money recovered by the end of second year

= (22000+20000)

= 42000



Sum of money recovered by the end of 3rd year

= (54000 – 42000)

= 12000

= [2+ 12000/18000) years

= 2.667* years

2) The Net present value (NPV) of each project.

NPV for project A;

Formula:

(CFn * PVFA at 14% for 4 years) – Initial Investment

PVFA at 14% for 4 years:

= [1/ (1+i) ^ n + 1/ (1+i) ^ n + 1/ (1+i) ^ n + 1/ (1+i) ^ n]

= [1/ (1+0.14) ^1 + 1/ (1+0.14) ^2 + 1/ (1+0.14) ^3 + 1/ (1+0.14) ^4]

= [0.8772 + 0.7695 + 0.6749 + 0.5920]

= [2.9136]

By putting values in Formula:

= (20000 * 2.9136) – 57000

= 1272

NPV for project B;

Formula:

Sum of the NPV (CFn) – Initial investment

Sum of the NPV (CFn)

= [CF1/ (1+i) ^ n + CF2/ (1+i) ^ n + CF3/ (1+i) ^ n + CF4/ (1+i) ^ n]

= [22000/ (1+0.14) ^1 + 20000/ (1+0.14) ^2 + 18000/ (1+0.14) ^3 + 16000/
(1+0.14) ^4]

= 19298.246 + 15389.352 + 12149.487 + 9473.284

= 56310.368

By putting values

= 56310.368 – 54000

= 2310.368

3) Decision

NPV

Project A

1272.00

Project B

2310.368

According to the NPV of both projects, I will recommend project B due to
greater NPV of project B from A.

PP

Project A

2.85 year

Project B

2.667 year

According to the PP of both projects, I will also recommend Project B,
because in Project B the payback period (PP) is little than Project A.