Consider the following projects:CASH FLOWS ($)PROJECT C_0 C_1 C_2 C_3

QUESTION

Consider the following projects:CASH FLOWS ($)PROJECT C_0 C_1 C_2 C_3 C_4 C_5A &nbsp¦
Part A Calculation of payback period: For project A: Pay back period means the period at which all earnings are pay back itself is known as payback period. Year Cash flows($) Cumulative cash flows($) 0 -1,000 -1,000 1 1000 0 2 0 3 0 4 0 5 0 Here, the cash flow is payback at the end of the 1st year. Therefore payback period is 1 year. For project B: Year Cash flows($) Cumulative cash flows($) 0 -2,000 -2,000 1 1,000 -1,000 2 1,000 0 3 4,000 4 1,000 5 1,000 The cash flows are payback itself at the end of the 2 nd year. Therefore, Payback period is 2 years. For project C: Year Cash flows($) Cumulative cash flows($) 0 -3,000 -3,000 1 1,000 -2,000 2 1,000 -1,000 3 0 -1,000 4 1,000 0 5 1,000 The cash flows are payback itself at the end of the 4 th year. Therefore, payback period is 4 years Part B: Project A and Project B is accepted because these two projects payback is 1 year and 2 years. Part C: Calculation of discounted payback period: Here, discount rate is 10%. For project A: Year Cash flows($) Present value factor at 10% Discounted cash flows($) Cumulative DCF 0 -1,000 1 -1,000 -1,000 1 1,000 0.9091 909.1 -91 2 0 0.8264 0 -91 3 0 0.7513 0 -91 4 0 0.6830 0 -91 5 0 0.6290 0 -91 For this project there is no payback period¦.

use there are no cash flows to payback. For Project B: Year Cash flows($) Present value factor at 10% Discounted cash flows($) Cumulative DCF 0 -2,000 1 -1,000 -1,000 1 1,000 0.9091 909.1 -91 2 1,000 0.8264 826.4 736 3 4,000 0.7513 3005.2 3,741 4 1,000 0.6830 683 4,424 5 1,000 0.6290 629 5,053 Year before recovery is = 2. Remaining Years = (826.4 736)/826.4 = 0.11 Payback period is 2.11 years. For project C: Year Cash flows($) Present value factor at 10% Discounted cash flows($) Cumulative DCF 0 -3,000 1 -1,000 -3,000 1 1,000 0.9091 909.1 -2,091 2 1,000 0.8264 826.4 -1,265 3 0 0.7513 0 -1,265 4 1,000 0.6830 683 -582 5 1,000 0.6290 629 48 Year before recovery is = 4. Remaining years calculation = (629 48)/629 = 0.92 Payback period is 4.92 years. Part D Project B only accept. Because it has 2.11 years payback period.

ANSWER:

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