A company is considering investing in either Project A or Project B. Relevant financial information is as follows:
Project A Project B
P P
Initial capital cost of equipment

Estimated Profits: 100,000 100,000
Year 1 25,000 10,000
Year 2 20,000 36,000
Year 3 14,000 40,000
Year 4
40,000 42,000
Life of project
4 years 4 years
Anticipated re-sale value of equipment
at the end of Year 4 10,000
nil
The company’s cost of capital is 8% and the applicable discount rates are as follows:

Year 1 0.926
Year 2 0.857
Year 3 0.794
Year 4 0.735

Required:
a. Calculate, in years and months, the simple payback period for each project. Assume that there are 12 months in a year, that each month has 30 days and that annual cash flows occur at an
even rate throughout the year.
b. Calculate, to the nearest P1, the net present value of each project. Assume that net cash inflows are received at the end of each year and the anticipated re-sale value of equipment is achieved.
(8 marks)
c. Identify five advantages of NPV as a capital budgeting technique.
d. Explain three reasons why capital budgeting decisions are important.

Answer rating: 100% (QA)

a To calculate the simple payback period for each project we need to find out the number of years and months required for the cumulative cash inflows to equal the initial capital cost of the equipment ... View the full answer