Caladonia is looking to invest in projects that will yield a high rate of return to the company. They are relying on a fairly new employee to research and report adequate analysis on which direction the company should go in. Learning Team B will use the provided company data to aid the new employee in this venture and to determine the payback periods, the internal rate of return, and to decide which project will be the most beneficial project for the company to invest in, in hopes of having a successful ROI. The initial working capital shown in the cash flow chart for each project is $100,000. Project A has an annual cash flow of $32,000 but project B receives a lump sum in the 5th year of $200,000. The ROI on the initial investment is 0.11.
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a.) The payback period for Project A is 3.125 years ($100000/32000 = 3.125 year). Project B’s payback period for $200,000 is 5 years or an estimated 4.5 years for the first 0.5 payment of $100,000 with a balance of $100,000 due at the 5th year mark.
b.) The NPV of project A is determined by taking the cash inflows minus the investment cost for Project A which will give you a net value of $18,272. -$100,000 for project A is the companies expense amount for funding the project. NPV = $118,272 – $100,000 = $18,272
The NPV for Project B equals the present value of $1.00 for 5 years at 0.11 which yields a NPV of $18,600. In order to find the present value of the $200,000 for the five years at .11 we will use the present value of $1.00 table. The factor of this table equals 0.593. NPV = $118,600 – $100,000 = $18,600See More on Finance