We are using the same numbers that we used for the previous problems. Please use the same file you used for the pay back problems and add a tab marked NPV. This time you will compare the projects using the NPV method. Please use a 10% discount rate.
To get full credit please do the following:
Define the technique. Discuss the difference between this method and the others we have used so far. Analyze the numbers in the problem using an excel spreadsheet. Use a 10% discount rate.
You must use Excel formulas which are on the ribbon in Excel marked Fx to make your calculations whenever possible.
Do not write your own formulas unless absolutely necessary. All information must be in Excel (Word documents will not be read and you will not get credit). Remember to carry out your answers at least two decimal places.
Add a new tab on your original excel file and submit this project.
| Year |
Project A |
Project B |
| 2014 |
($3,000,000) |
($3,000,000) |
| 2015 |
$0 |
$975,000 |
| 2016 |
$600,000 |
$975,000 |
| 2017 |
$900,000 |
$975,000 |
| 2018 |
$2,700,000 |
$975,000 |
Payback method analyzes the period of time required to recover the money invested in a project. It is a very simple tool for analyzing the feasibility of any project. It is generally denoted in months or years, i.e., the number of years involved in reaping the money initially invested. The tool can be easily used for comparison of two or more projects; however, the disadvantage if the tool is that it does not take into account the significance of time value of money. Also, the payback methods considers the time period until which the cumulative cash inflows is equal to or above the initial investment. It ignores the future cash inflows beyond the point at which the initial investment is recouped in full.
"Project A has uneven cash inflows and requires the cumulative method while Project B has constant and uniform cash inflows.
Both projects have been analyzed utilizing the payback method as follows: "
"As mentioned above, Payback Period doesn't take into consideration the time value of money. Thus, the cumulative cash flows columns for both the projects suggest that the payback period, i.e. the period by which the initial investment of $30,00,000 would be recouped in full shall lie between 2017 and 2018 as during this time the cumulative cash flows becomes positive.
Also, the actual payback period, i.e. by which the initial investment is recovered is 3.56 years for Project A and 3.08 years for Project B."
Attachment:- Capital Investment.xlsx