Calculate the Net Present Value given two proposed projects of AIM Manufacturing Corp. Project # 1: Initial Investment:...

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Finance

Calculate the Net Present Value giventwo proposed projects of AIM Manufacturing Corp.
Project # 1:
Initial Investment: $100,000
Cash Inflows:
Year 1: $45,000
Year 2: $48,000
Year 3: $55,000
Year 4: $75,000
Year 5: $150,000
Project # 2:
Initial Investment: $100,000
Cash Inflows:
Year 1: $65,000
Year 2: $45,000
Year 3: $25,000
Year 4: $10,000
Year 5: $1,000
What are the Payback Period for eachproject using the NPV Method? Which project would you select in youwere looking for higher cash inflows in your capital budget?Why....

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4.3 Ratings (806 Votes)

NPV is calculated below-

Project 1
Year	Cash flow	8% Discounted factor	Discounted cash flows
1	45000	0.926	41666.67
2	48000	0.857	41152.26
3	55000	0.794	43660.77
4	75000	0.735	55127.24
5	150000	0.681	102087.48
			181606.94
		Initial Investment	100000
		NPV	81606.94

Project 2
Year	Cash flow	8% Discounted factor	Discounted cash flows
1	65000	0.926	60185.19
2	45000	0.857	38580.25
3	25000	0.794	19845.81
4	10000	0.735	7350.30
5	1000	0.681	680.58
			125961.54
		Initial Investment	100000
		NPV	25961.54

Thus, NPV of Project 1 is higher which should be selected.

Payback Period

A + B/C

Formula- Period with negative cumulative cash flow+ Absolute value of cash flow at end of period A/ Total cash inflow during A

Project 1
Year	Cash flow	Cumulative
0	-100000	-100000
1	45000	-55000
2	48000	-7000
3	55000	48000
4	75000	123000
5	150000	273000
	Payback Period	2.13

Project 2
Year	Cash flow	Cumulative
0	-100000	-100000
1	65000	-35000
2	45000	10000
3	25000	35000
4	10000	45000
5	1000	46000
	Payback Period	1.78

Thus, payback period of project 2 is accepted. However, by looking at NPV, it can be said that Project 1 should be selected because over the time, investment made will yield higher returns than Project 2.

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