Question

Project B has an upfront cost of $45,000 and expected OCFs (already calculated) of $22,000 year 1, $26,000 year 2, $8,000 year 3 WACC 12%.

a. What is the NPV for project B?
b. What is the regular payback for B?
c. Which is preferred A or B?

Answer 1

The NPV for Project B is calculated by discounting future cash flows to their present value using a WACC of 12% and subtracting the initial investment. Regular payback period sums OCFs until the initial cost is recovered. No preference can be determined without Project A's details.

Step-by-step explanation:

To answer your question, we first need to calculate the net present value (NPV) of Project B. Project B has an upfront cost of $45,000 and expected operating cash flows (OCFs) of $22,000 for year 1, $26,000 for year 2, and $8,000 for year 3. The weighted average cost of capital (WACC) is 12%.

To calculate the NPV for Project B, we discount the future cash flows back to present value using the WACC and subtract the initial investment:

• Year 1 NPV of OCF = $22,000 / (1 + 0.12)^1
• Year 2 NPV of OCF = $26,000 / (1 + 0.12)^2
• Year 3 NPV of OCF = $8,000 / (1 + 0.12)^3

Then, sum these values and subtract the initial investment:

• Total NPV = (Year 1 NPV + Year 2 NPV + Year 3 NPV) - $45,000

To calculate the regular payback period for Project B, you add the OCFs until the initial cost is recovered. Since the question does not provide information regarding Project A, we cannot determine which is preferred without details on Project A's NPV or payback period.