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Question 3 Not yet answered Marked out of 20
Subject:FinancePrice:2.86 Bought11
Question 3 Not yet answered Marked out of 20.00 Flag question You are financial analyst for the ARON Company. The director of capital budgeting has asked you to analyze two proposud capital investments Project A and project each project has a cost of $ 9,000 and the cost of capital for each is 10%. The project expected net cash flow are as follows: Expected Net Cash Flows Year Project A -9,000 5.000 3,000 2.000 Project B -9,000 3,000 3,500 2,500 14,500 4,000 Calculate each projects NPV and Pay back period [4*4=16 marks] NPV A ( ME NPV B (M PAY BACK ACML PAY BACKBM Which project or projects should be accepted if they are independent? [4 marks)
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Q.I
NPV
Project A = $2,259
Project B = $1,572
|
Project A |
Project B |
||||
|
Year |
PV factor @10% |
Cash Flow |
PV of CF @10% |
Cash Flow |
PV of CF @10% |
|
0 |
1.000 |
-9,000 |
-9,000 |
-9,000 |
-9,000 |
|
1 |
0.909 |
5,000 |
4,545 |
3,000 |
2,727 |
|
2 |
0.826 |
3,000 |
2,479 |
3,500 |
2,893 |
|
3 |
0.751 |
2,000 |
1,503 |
2,500 |
1,878 |
|
4 |
0.683 |
4,000 |
2,732 |
4,500 |
3,074 |
|
NPV |
2,259 |
1,572 |
Pay Back Period : Period required to recover initial investment
Project A = 2 + (1,000 / 2,000) = 2.5 Years
Project B = 3 years
|
|
Project A |
Project B |
||
|
Year |
Cash Inflow |
Cumulative Cash Inflow |
Cash Inflow |
Cumulative Cash Inflow |
|
1 |
5,000 |
5,000 |
3,000 |
3,000 |
|
2 |
3,000 |
8,000 |
3,500 |
6,500 |
|
3 |
2,000 |
10,000 |
2,500 |
9,000 |
|
4 |
4,000 |
14,000 |
4,500 |
13,500 |
|
Total |
14000 |
13,500 |
Q.II
Project A
Project A should be accepted because it has higher NPV as well as shorter pay-back period
