Week 3 Team Assignment

The payback period is essentially the duration in which it takes the initial investment to be recovered.
For Project A, the initial investment equals $100,000. As such, within a three year period, 96,000 will be recovered (32,000 x 3) The amount remaining is 4,000 (100,000 - 96,000). This will be recovered in the fourth year. In order to recover the remaining amount, it will take an additional .125 years (4,000/32,000). Accordingly, the total payback period is 3.125 years.
For Project B, there is a $100,000 initial investment and no recovery until the fourth year. In the fifth year, we receive $200,000; therefore, half of the fifth year is required in order for the $100,000 to be recovered. As such, the total payback period is 4.5 years.
Net present value (NPV) is is found by --> Sum of Present Value of Inflows minus the Initial Investment. In order to calculate the present value, we must discount the cash flows at the required return. The rate provided is 11%. We receive the PV factor as 1/(1+r)^n where r equals the discounting rate = 11% and n equals the year where the cash flow takes place. The present value is equal to the cash flow multiplied by the discounting factor.  For Project A, the present value calculation is the following:
Year	Cash Flow	Discounting Factor	Present Value
1	32 000	0,9009	28 828,83
2	32 000	0,81162	25 971,92
3	32 000	0,73119	23 398,12
4	32 000	0,65873	21 079,39
5	32 000	0,59345	18 990,44
	Sum of all present values		118 268,70	???

Week 3 - Team Assignment

The payback period is essentially the duration in which it takes the initial investment to be recovered. For Project A, the initial investment equals $100,000. As such, within a three year period, 96,000 will be recovered (32,000 x 3) The amount remaining is 4,000 (100,000 - 96,000). This will be recovered in the fourth year. In order to recover the remaining amount, it ...

• Week 3 - Team Assignment.xls 13 KB