Inatech is contemplating two different projects and decides to perform a financial analysis to determine which is more financially lucrative
Project A and B have the cash flows as shown and Inatech uses a required rate of return of 10% and an inflation rate of 4%. Compute the payback in years and the net present value for both projects and offer advice as to the best course of action.
Year A B
0 -$250,000 -$400,000
1 $75,000 $125,000
2 $155,000 $230,000
3 $200,000 $288,000
4 $175,000 $265,000
5 $160,000 $225,000
Year A Cumulative A Discount NPV A B Cumulative B NPV B
0 -$250,000 -$250,000 1.000 -$250,000 -$400,000 -$400,000 -$400,000
1 $75,000 -$175,000 0.877 $65,789 $125,000 -$275,000 $109,649
2 $155,000 -$20,000 0.769 $119,267 $230,000 -$45,000 $176,978
3 $200,000 $180,000 0.675 $134,994 $288,000 $243,000 $194,392
4 $175,000 $355,000 0.592 $103,614 $265,000 $508,000 $156,901
5 $160,000 $515,000 0.519 $83,099 $225,000 $733,000 $116,858
The NPV for project A is $256,764 and the NPV for project B is higher at $354,778. Project A has a longer discounted payback, 3.3 years, compared to project B's payback of 3.2 years. The best course of action based solely on financial considerations is to opt for project B if only one can be implemented.
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