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Copy of NPV%2C+IRR%2C+PB%2C+PI - a What is the payback...

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a) What is the payback period? Payback period is defined as the expected number of years required to recover the original investmen Project A Period 0 1 2 3 Net cash flow -1,250,000 350,000 350,000 350,000 Cumulative NCF -1,250,000 -900,000 -550,000 -200,000 Payback = Cash flow during year = 3 + 200,000/350,000 = 3.57 years Project B Period 0 1 2 3 Net cash flow -1,400,000 400,000 400,000 400,000 Cumulative NCF -1,400,000 -1,000,000 -600,000 -200,000 Payback = Cash flow during year = 3 + 200,000/400,000 = 3.50 years b) What is the net present value of the two projects? Project A Project B Cash Flow Years Cash Flow Cash Flow Years Cash Flow 0 (1,250,000) 0 (1,400,000) 1 350,000 1 400,000 2 350,000 2 400,000 3 350,000 3 400,000 4 350,000 4 400,000 5 350,000 5 400,000 6 350,000 6 400,000 7 350,000 7 400,000 8 350,000 8 400,000 9 350,000 9 400,000 10 350,000 10 400,000 11 350,000 11 400,000 12 350,000 12 400,000 13 350,000 13 400,000 14 350,000 14 400,000 15 350,000 15 400,000 16 350,000 16 400,000 17 350,000 17 400,000 18 350,000 18 400,000 19 350,000 19 400,000 20 350,000 20 400,000 NPV = 1,364,305 NPV = 1,587,777 NPV of Project B is the higher. c) What is the Internal rate of return of the two projects? Year before full recovery + Unrecovered cost at start of year Year before full recovery + Unrecovered cost at start of year
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Project A Project B Cash Flow Years Cash Flow Cash Flow Years Cash Flow 0 (1,250,000) 0 (1,400,000) 1 350,000 1 400,000 2 350,000 2 400,000 3 350,000 3 400,000 4 350,000 4 400,000 5 350,000 5 400,000 6 350,000 6 400,000 7 350,000 7 400,000 8 350,000 8 400,000 9 350,000 9 400,000 10 350,000 10 400,000 11 350,000 11 400,000 12 350,000 12 400,000 13 350,000 13 400,000 14 350,000 14 400,000 15 350,000 15 400,000
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