Answer the following parts a and b : 

a . Two projects , A and B , provide the following cash flows over a period of six years . Which one of these projects will be selected on the basis of the payback period ?

Year  0    1    2    3   4   5    6 

A -   100 20  30  50 10 10   0 

B -   100 10  20  30  40 70  80 

b . Assuming that the cost of capital is 10 % , calculate the NPV of projects A and B as defined in the part a. Assume a tax rate of 20 % , calculate after tax NPV ? If the two projects are mutually exclusive , which one will be preferred ? 

Answer rating: 100% (QA)

SOLUTION a The payback period is the length of time it takes for a project to recover its initial investment It is calculated by adding up the cash flows until the cumulative cash flow becomes equal t... View the full answer