Question

Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 10 percent.

Year Project F Project G
0 $150,000 $235,000
1 78,000 54,000
2 54,000 72,000
3 68,000 103,000
4 60,000 139,000
5 54,000 156,000

Required:
a. Calculate the payback period for both projects.
b. Calculate the NPV for both projects.

Answer 1

The payback period for Project F is 3 years and for Project G is also 3 years. The NPV for Project F is $72,652.52 and for Project G is $32,607.23.

Step-by-step explanation:

a. Calculate the payback period for both projects:

To calculate the payback period, we need to determine how long it takes for each project to recover its initial investment.

Project F: The payback period can be calculated by adding up the cash inflows from each year until the total is greater than or equal to the initial investment. In this case, it takes 3 years to recover the initial investment of $150,000.

Project G: Similarly, for Project G, it takes 3 years to recover the initial investment of $235,000.

b. Calculate the NPV for both projects:

The Net Present Value (NPV) measures the profitability of an investment by calculating the present value of its future cash flows, discounted back to the present using the required return rate.

Project F: The NPV can be calculated by discounting the cash flows from each year at a rate of 10 percent. The NPV for Project F is $72,652.52.

Project G: Similarly, for Project G, the NPV is $32,607.23.

Answer 2

Instructions are listed below.

Step-by-step explanation:

Giving the following information:

The company has historically used a three-year cutoff for projects. The required return is 10 percent.

Year - Project F - Project G

0: $150,000 - $235,000

1: 78,000 - 54,000

2: 54,000 - 72,000

3: 68,000 - 103,000

4: 60,000 - 139,000

5: 54,000 - 156,000

A) Payback period: it is the necessary time to recover the initial investment.

Project F:

Io= -150,000

Year 1= +78,000= -72,000

Year 2= +54,000= -18,000

Year 3=+68,000= 50,000

We have to determine the number of days:

(18,000/68,000)= 0.26*365= 95 days

It will take 3 years and 95 days to recover the initial investment

Project G:

Io= -235,000

Year 1= +54,000= -181,000

Year 2= +72,000= -109,000

Year 3= +103,000= -6,000

Year 4= +139,000= 133,000

We have to determine the number of days:

(6,000/139,000)= 0.043*365= 16 days

It will take 4 years and 16 days.

2) To calculate the Net present value, we need to discount the cash flows.

NPV= -Io + ∑[Cf/(1+i)^n]

Cf= cash flow

Project F:

NPV= -150,000 + 78,000/1.10 + 54,000/1.10^2 + 68,000/1.10^3 ...

NPV= $91,137.15

Project G:

NPV= -235,000 + 54,000/1.10 + 72,000/1.10^2 + ...

NPV= $142,783.06