Question 1. As director of capital budgeting for Meeker Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:
Project X Project Z
Year Cash Flow Cash Flow
0 $(100,000.00) $(100,000.00)
1 $50,000.00 $10,000.00
2 $40,000.00 $30,000.00
3 $30,000.00 $40,000.00
4 $10,000.00 $60,000.00
Assume Meeker's cost of capital is: 15%
A) Calculate the NPV of each project based upon the above assumptions. Based upon result which project would you choose or would you choose not to do either project? Explain your decision.
B) Consider that the investment cost is now $125,000 and that years 1 through 10 both provide cash flow for each project as assumed below. What would be the payback period for each project?
Project X Project Z
Year Cash Flow Cash Flow
0 $(125,000.00) $(125,000.00)
1 $50,000.00 $10,000.00
2 $40,000.00 $20,000.00
3 $30,000.00 $25,000.00
4 $10,000.00 $35,000.00
5 $10,000.00 $35,000.00
6 $15,000.00 $40,000.00
7 $20,000.00 $35,000.00
8 $25,000.00 $45,000.00
9 $38,000.00 $55,000.00
10 $40,000.00 $60,000.00
C) Based on the data in 1b what would the NPV of the projects be and which one would you choose?
Is this different than if you based your decision on the payback period alone?