Your company is currently considering two investment projects. Each project requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and the investments will produce the following after tax cash flows:YearProject AProject B1$5,000,000$20,000,0002$10,000,000$10,000,0003$15,000,000$8,000,0004$20,000,000$6,000,000 a) Calculate the payback period for both projects, then compare to identify which project the firm should undertake. [Note: you are supposed to show every step of your calculation and interpret the result.]

Question
Asked Oct 27, 2019
55 views

Your company is currently considering two investment projects. Each project requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and the investments will produce the following after tax cash flows:

Year

Project A

Project B

1

$5,000,000

$20,000,000

2

$10,000,000

$10,000,000

3

$15,000,000

$8,000,000

4

$20,000,000

$6,000,000

 

a) Calculate the payback period for both projects, then compare to identify which project the firm should undertake. [Note: you are supposed to show every step of your calculation and interpret the result.]

check_circle

Expert Answer

Step 1

Payback period can be defined as the time length required by the project to recover the total cash outflow made at the time of starting of project.

Step 2

The table below shows the cash inflow for each year and cumulative cash flows for project A.

fullscreen
Step 3

The formula to calculate paybac...

В
Payback period = A+-
С
Нere,
A is the extreme period in which cumulative cash flow is negative
B is the cumulative cash flow in period A (ignoring any negative sign)
C is the cash flow occured in the period after A
help_outline

Image Transcriptionclose

В Payback period = A+- С Нere, A is the extreme period in which cumulative cash flow is negative B is the cumulative cash flow in period A (ignoring any negative sign) C is the cash flow occured in the period after A

fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Finance

Related Finance Q&A

Find answers to questions asked by student like you

Show more Q&A add
question_answer

Q: If you disounted a set of positive real cash flows with a nominal discount rate and inflation were p...

A: Justification:Suppose the positive cash flows are discounted with the inflation rate, which is posit...

question_answer

Q: Why do most acquisitions fail to create shareholder value?

A: Mergers and acquisitions generally failed to create or add value for the shareholders because of ove...

question_answer

Q: I attached an image of things that "could go onto a cash flow statement" would you advise using any ...

A: The building of a factory or purchase of equipment will be counted while calculating capital budgeti...

question_answer

Q: Camber Corporation has to decide if they can finance purchasing 10 new machines for all their manufa...

A: The actual cost of each machine is $1,730,000 and total cost to be required to purchase 10 machines ...

question_answer

Q: What are the three forms of Efficient MArket Hypothesis and what are the criticisms of each from the...

A: The Efficient Market Hypothesis means that the market investors have an entree to all information ob...

question_answer

Q: Optimal corporation wants to expand their manufacturing facilities. They have two choices, first to ...

A: It is given that firm must incur $290,000 for two years, if it chooses option 1. The second option i...

question_answer

Q: You own a furniture manufacturing company. You are looking to expand into glass furniture and need t...

A: Computation of ARR:Machine 2 can be purchased as it has the higher ARR of 32.73%.Excel spread sheet:

question_answer

Q: 9. Duration is an important measure of interest rate risk. The duration is the percent the price of ...

A: As per the given information, the percentage change in the bond\'s yield to maturity is 2% (7% - 5%)...

question_answer

Q: At age 18, Susan did nothing. She waited until she was 28 to start depositing $2000 per year at the ...

A: Annuity, A = $ 2,000Interest rate, r = 12%Number of annuities = n = 65 - 28 = 37