Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 10 percent. Year Project F Project G

0 $150,000 $235,000

1 78,000 54,000

2 54,000 72,000

3 68,000 103,000

4 60,000 139,000

5 54,000 156,000

Required:

a. Calculate the payback period for both projects.

b. Calculate the NPV for both projects.

Instructions are listed below.

Explanation:

Giving the following information:

The company has historically used a three-year cutoff for projects. The required return is 10 percent.

Year - Project F - Project G

0: $150,000 - $235,000

1: 78,000 - 54,000

2: 54,000 - 72,000

3: 68,000 - 103,000

4: 60,000 - 139,000

5: 54,000 - 156,000

A) Payback period: it is the necessary time to recover the initial investment.

Project F:

Io = - 150,000

Year 1 = + 78,000 = - 72,000

Year 2 = + 54,000 = - 18,000

Year 3=+68,000 = 50,000

We have to determine the number of days:

(18,000/68,000) = 0.26*365 = 95 days

It will take 3 years and 95 days to recover the initial investment

Project G:

Io = - 235,000

Year 1 = + 54,000 = - 181,000

Year 2 = + 72,000 = - 109,000

Year 3 = + 103,000 = - 6,000

Year 4 = + 139,000 = 133,000

We have to determine the number of days:

(6,000/139,000) = 0.043*365 = 16 days

It will take 4 years and 16 days.

2) To calculate the Net present value, we need to discount the cash flows.

NPV = - Io + ∑[Cf / (1+i) ^n]

Cf = cash flow

Project F:

NPV = - 150,000 + 78,000/1.10 + 54,000/1.10^2 + 68,000/1.10^3 ...

NPV = $91,137.15

Project G:

NPV = - 235,000 + 54,000/1.10 + 72,000/1.10^2 + ...

NPV = $142,783.06