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Financial Management NPV

Question Description

1) Anoma Inc. is considering two mutually exclusive projects. Each requires an initial investment of $100,000. John Shell, president of the company, has set a maximum payback period of 4 years. The after-tax cash inflows associated with each project are shown in the following table:

Year

Cash inflow of Project A

Cash inflow of Project B

1

$ 10,000

$ 40,000

2

20,000

30,000

3

30,000

20,000

4

40,000

10,000

5

20,000

20,000

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  1. Determine the payback period of each project.
  2. Because they are mutually exclusive, Shell must choose one. Which should the company invest in?
  3. Explain why one of the projects is a better choice than the other.

2) Neil Corporation has three projects under consideration. The cash flows for each project are shown in the following table. The firm has a 16% cost of capital.

Project A

Project B

Project C

Initial Investment

$40,000

$ 40,000

$ 40,000

Year

Cash inflows ($)

1

13,000

7,000

19,000

2

13,000

10,000

16,000

3

13,000

13,000

13,000

4

13,000

16,000

10,000

5

13,000

19,000

7,000

  1. Calculate each project’s payback period. Which project is preferred according to this method?
  2. Calculate each project’s net present value (NPV). Which project is preferred according to this method?
  3. Comment on your findings in parts a and b, and recommend the best project. Explain your recommendation.
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