Dino Corporation is trying to decide which of five investments opportunities it should undertake. The company's cost of capital is 16%. Owing to a cash shortage, the company has a policy that it will not undertake any investment unless it has a payback period of less then three years. The company is unwilling to undertake more then two investment projects.
The following data apply to the alternatives:
Investment Initial Cost Expected Returns
A $100,000 $30,000 per year for 5 years
B 50,000 25,000 per year for 6 years
C 30,000 8,000 per year for 10 years
D 20,000 7,000 per year for 6 years
E 10,000 3,500 per year for 3 years
1) Using the payback method, screen out any investment project that fails to meet the company's payback period requirement.
2) Using the present value method, determine which of the remaining projects the company should undertake, keeping in mind the capital rationing constraint.
Using the payback method, screen out any investment project that fails to meet the company's payback period requirement.
Payback period is defined as the expected number of years required to recover the original investment.
Payback period = Initial investment/Expected return per year
Payback period = 100,000/30,000 = ...
This solution is comprised of a detailed explanation to calculate payback and NPV for Dino Corporation's investments.