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Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows: Expected Net Cash Flows Time Project A Project
Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows:
| Expected Net Cash Flows | ||
| Time | Project A | Project B |
| 0 | ($375) | ($575) |
| 1 | ($300) | $190 |
| 2 | ($200) | $190 |
| 3 | ($100) | $190 |
| 4 | $600 | $190 |
| 5 | $600 | $190 |
| 6 | $926 | $190 |
| 7 | ($200) | $0 |
What is the regular payback period for these two projects?
| Project A | |||||||||
| Time period | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | |
| Cash flow | (375) | (300) | (200) | (100) | 600 | $600 | $926 | ($200) | |
| Cumulative cash flow | |||||||||
| Intermediate calculation for payback | |||||||||
| Payback using intermediate calculations | |||||||||
| Project B | |||||||||
| Time period | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | |
| Cash flow | ($375) | $190 | $190 | $190 | $190 | $190 | $190 | $0 | |
| Cumulative cash flow | |||||||||
| Intermediate calculation for payback | |||||||||
| Payback using intermediate calculations | |||||||||
| Payback using PERCENTRANK | Ok because cash flows follow normal pattern. | ||||||||
| g. At a cost of capital of 12%, what is the discounted payback period for these two projects? | |||||||||
| WACC = | 12% | ||||||||
| Project A | |||||||||
| Time period | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | |
| Cash flow | ($375) | ($300) | ($200) | ($100) | $600 | $600 | $926 | ($200) | |
| Disc. cash flow | |||||||||
| Disc. cum. cash flow | |||||||||
| Intermediate calculation for payback | |||||||||
| Payback using intermediate calculations | |||||||||
| Project B | |||||||||
| Time period | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | |
| Cash flow | ($575) | $190 | $190 | $190 | $190 | $190 | $190 | $0 | |
| Disc. cash flow | |||||||||
| Disc. cum. cash flow | |||||||||
| Intermediate calculation for payback | |||||||||
| Payback using intermediate calculations | |||||||||
| Discounted Payback using PERCENTRANK | Ok because cash flows follow normal pattern. |
| |||||||
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The Validation Of Risk Models
Authors: S. Scandizzo
1st Edition
1137436956, 978-1137436955
