FIN622 Assignment # 1

Question:
Required: • Calculate the payback period of each project.• Calculate the Net present value (NPV) of each project.• On the basis of results of pay back period and NPV, which project would you recommend to your company and why?
1. The payback period of each projectThe Payback Period (PP): For the Project A = Initial Investment / Cash Flow (I0/Ct)= 57000/20000= 2.85yearThe Payback Period (PP): For the Project A Payback period lie between 2nd year and 3rd yearSum of the money recovered by the end of second year= (22000+20000)= 42000Sum of money recovered by the end of 3rd year
= (54000 – 42000) = 12000= [2+ 12000/18000) years= 2.667 years2. The Net present value (NPV) of each projectNPV for project A:
Formula: (CFn * PVFA at 14% for 4 years) – Initial InvestmentPVFA 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= 1272NPV for project B:Formula:Sum of the NPV (CFn) – Initial investmentSum 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= 56310.368By putting values= 56310.368 – 54000= 2310.3683. On the basis of results of pay back period and NPV, which project would you recommend to your company and why?
Project A 2.85 year PPProject B 2.667 year PP
According to the PP of both projects, I will also recommend Project B, because in Project B payback period (PP) is less than Project A.Project A 1272.00 NPVProject B 2310.368 NPVAccording to the result of NPV of both projects, I recommend project B because NPV of project B greater from project A.