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

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