## Answers

Payback Method:

Project A

Payback period=full years until recovery + unrecovered cost at the start of the year/cash flow during the year

= 3 years + ($130,000 - $120,000)/$40,000

= 3 years + $10,000/ $40,000

= 3 years + 0.25

= 3.25 years.

Project A

Payback period=full years until recovery + unrecovered cost at the start of the year/cash flow during the year

= 1 year + ($130,000 - $85,000)/$20,000

= 1 year + $45,000/ $70,000)

= 1 year + 0.6429

= 1.64 years.

Ranking of projects by payback method:

- Project B
- Project A

b.Project A

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

- Press the CF button.
- CF0= -$130,000. It is entered has a negative value since it is a cash outflow.
- Cash flow for all the years should be entered.
- Press Enter and down arrow after inputting each cash flow.
- After entering the last cash flow, press the NPV button and enter the cost of capital of 8%.
- Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 8% cost of capital is **$54,915.19.**

Project B

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

- Press the CF button.
- CF0= -$130,000.
It is entered has a negative value since it is a cash outflow.

- Cash flow for all the years should be entered.
- Press Enter and down arrow after inputting each cash flow.
- After entering the last cash flow, press the NPV button and enter the cost of capital of 8%.
- Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 8% cost of capital is **$65,509.72. 31.27%**

Ranking of projects by the net present value method:

- Project B
- Project A

c. Project A

Internal rate of return is calculated using a financial calculator by inputting the below:

- Press the CF button.
- CF0= -$130,000. It is entered with a negative sign since it is a cash outflow.
- Cash flow for each year should be entered.
- Press Enter and down arrow after inputting each cash flow.
- After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is **20.93%.**

Project B

Internal rate of return is calculated using a financial calculator by inputting the below:

- Press the CF button.
- CF0= -$130,000. It is entered with a negative sign since it is a cash outflow.
- Cash flow for each year should be entered.
- Press Enter and down arrow after inputting each cash flow.
- After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is **31.27%.**

Ranking of projects by the internal rate of return method:

1.Project B

2.

Project A

I would recommend to accept **project B** since it has the highest net present value.

In case of any query, kindly comment on the solution.

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