1. Payback Analysis
Two new wind-farm tower projects are proposed for a small company
that installs them in south western Pennsylvania. Project A will
cost $250,000 to complete and is expected to have an annual net
cash flow of $75,000. Project B will cost $150,000 to complete and
should generate annual net cash flows of $52,000. As a small
company, the owner and senior management team are very concerned
about their cash flow.
Use the payback period method and determine which project is better
from a cash flow standpoint.
Show your work and include any formulas used to calculate PP.
2. Net Present Value
A recent project nominated for consideration at your company has
a four-year cash flow of $20,000; $25,000; $30,000; and $50,000.
The cost of the project is $75,000.
a. If the required rate of return is 20%, conduct a discounted cash flow
calculation to determine the NPV.
b. What is the benefit-cost ratio for the project?
c. What would the
NPV of the above project be if the inflation rate was expected to
be 4% in each of the next four years?
You will be assessed on the correctness of your calculations
(40 points) and on presenting your work and results in a
professional manner (10 points)