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Payback, NPV

The cash flows from two capital expenditure projects are shown below. The discount rate is 10%.
Project A Project B
Initial cost \$(10,000) \$(10,000)
Year 1 6,000 2,000
Year 2 5,000 4,000
Year 3 1,000 8,000
Year 4 0 16,000

A. What are the payback periods for both projects?
B. What is the NPV for both projects?
C. What are the drawbacks from using payback as a method for selecting projects?

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Payback versus NPV
The cash flows from two capital expenditure projects are shown below. The discount rate is 10%.
Project A Project B
Initial cost (\$10,000) (\$10,000)
Year 1 6,000 2,000
Year 2 5,000 4,000
Year 3 1,000 8,000
Year 4 0 16,000

A. What are the payback periods for both projects?

Payback Period

Payback period is the number of years in which the initial investment is recouped
Payback = Year before full recovery + (unrecovered cost at start of year/Cash Flow during year)

Project ...

Solution Summary

Calculates Payback period and NPV of two projects and explains the drawbacks from using payback as a method for selecting projects.

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