B in order to choose between project a and project b the...

(b) In order to choose between Project A and Project B, the project planner must make a decision. The following data pertains to the projects: Project P Project Q Capital cost of asset 60,000 60,000 Profits before depreciation Project A Project B Year 1 20,000 50,000 Year 2 30,000 20,000 Year 3 40,000 5,000 Year 4 50,000 5,000 Year 5 60,000 5,000 (i) From the analysis using payback period method, which project will be more preferred?

Transcript

00:01 Let's solve this question.

00:02 Here we have given a year, a project a and here the project b.

00:07 So here year that is 0, 1, 2, 3, 4 and 5 and here project a that is $5000, minus $5000, 2750, 2750, 2750, 2750 and 2750.

00:26 Now here project b that is minus 9000, 1000, 3000, 5000, 7000, 9000.

00:38 So here we in this question in the part a we need to find what which project should be selected if the simple payback method is used to make the determination.

00:51 So therefore here first of all for this part a we need to find the cumulative cash flow for project a and then for project b.

01:07 So here for project a it is minus 5000, minus 2250 and here it is 5000.

01:15 Here minus 9000, minus 8000 and minus 5000.

01:21 So here payback period for project a that is equals to year that is 1 plus cash flow required in the payback year divided by the total cash flow in the year.

01:41 So that the total cash flow in the payback year.

01:45 So that is equals to 1 plus in bracket 2750 minus 2250 that will be divided by 2750.

01:54 So that is equals to we will get 1 .18 years and here the payback for project b that is equals to year prior to backpack that is 2 plus here cash flow required in the backpack year that is 5000 divided by the total.

02:13 So that is also 5000.

02:15 So that is equals to 3 years.

02:16 So here we can say that project a should be selected based on the payback period at as it has the lower payback period when compared to b.

02:37 Now here in the part b we need to find which project should be selected if npv were used at 10 % interest.

02:48 So here we can say that for the pvf for 10 % here it is for c it is 1 0 .90909 0 .82645 0 .75131 0 .68301 and 0 .62092.

03:16 Now here the pva pv of cash flow of project a and then that of project b...

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