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Financial management - Payback period question

   

Added on  2019-10-31

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FINANCIALMANAGEMENTSTUDENT ID:[Pick the date]

FINANCIAL MANAGEMENTQuestion 3a)I) Payback period calculation for project XInitial investment = $ 40,000Total cash outflow in first two years = 12000 + 18000 = $ 30,000Investment still to be recovered at the end of t=2 years = 40000-30000 = $10,000Time in the 3rd year required to recover the pending investment = (10000/27000) = 0.37Hence, total payback period = 2+0.37 = 2.37 yearsPayback period calculation for project YInitial investment = $ 40,000Total cash outflow in first two years = 18000 + 18000 = $ 36,000Investment still to be recovered at the end of t=2 years = 40000-36000 = $4,000Time in the 3rd year required to recover the pending investment = (4000/18000) = 0.22Hence, total payback period = 2+0.22 = 2.22 yearsSince the payback period of project Y is lesser than project X, hence project Y would be the preferred one.ii) In the given case, since the cashflows tend to occur only at the end of the year, hence, thepayback period for both the projects would be three years as only when the third year cashinflow would be received at the end of the year would the original investment or cash outflowwould be recovered. As a result, in such a situation decision making cannot be carried outusing this metric.(iii) The relevant computation of NPV of the two projects for the different values of discount rates is summarised below.DiscountNPV ($)Rate(%)ProjectXProject Y511078.729018.47

FINANCIAL MANAGEMENT106070.624763.34151798.311098.0520-1875-2083.33The requisite graph is indicated below.(iv) The IRR is defined as the discount rate for which the NPV becomes equal to zero.IRR calculation for project XThe following table aids in the computation of IRR for this project.IRR = 17.4%IRR calculation for project YThe following table aids in the computation of IRR for this project.

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