Your company is currently considering two investment projects. Each project requires an upfront expenditure of $25...

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Finance

Your company is currently considering two investment projects.Each project requires an upfront expenditure of $25 million. Youestimate that the cost of capital is 10% and the investments willproduce the following after tax cash flows:
Year
Project A
Project B
1
$5,000,000
$20,000,000
2
$10,000,000
$10,000,000
3
$15,000,000
$8,000,000
4
$20,000,000
$6,000,000
a) Calculate the payback period forboth projects, then compare to identify which project the firmshould undertake. [Note: you are supposed to show every step ofyour calculation and interpret the result.]
b) Evaluate the advantages anddisadvantages of using the payback method in investment decisionsand assess the situations where it should be used. [Note: rememberto use Harvard referencing to reference your sources]

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4.3 Ratings (564 Votes)

Payback Period for PROJECTA Year Annual cash flows Cumulative annual cash flows 0 25000000 25000000 1 5000000 20000000 2 10000000 10000000 3 15000000 5000000 4 20000000 25000000 Payback Period for ProjectA Years before full recover Unrecovered cash inflow at start of the yearcash flow during the year 200 Years 10000000 15000000 200 Years 067 Years 267 Years Payback Period for PROJECTB Year Annual cash flows Cumulative annual cash flows 0 25000000 25000000 1 20000000 5000000 2 10000000 5000000 3 8000000 13000000 4 6000000 19000000 Payback See Answer

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Transcribed Image Text

Your company is currently considering two investment projects.Each project requires an upfront expenditure of $25 million. Youestimate that the cost of capital is 10% and the investments willproduce the following after tax cash flows:YearProject AProject B1$5,000,000$20,000,0002$10,000,000$10,000,0003$15,000,000$8,000,0004$20,000,000$6,000,000a) Calculate the payback period forboth projects, then compare to identify which project the firmshould undertake. [Note: you are supposed to show every step ofyour calculation and interpret the result.]b) Evaluate the advantages anddisadvantages of using the payback method in investment decisionsand assess the situations where it should be used. [Note: rememberto use Harvard referencing to reference your sources]

Year	Project A	Project B
1	$5,000,000	$20,000,000
2	$10,000,000	$10,000,000
3	$15,000,000	$8,000,000
4	$20,000,000	$6,000,000