Accounts & Finance

"To solve this problem, we'll need to calculate the payback period, NPV, and IRR for each project based on the provided cash flows and discount rate. Then, we'll rank the projects using these techniques and make a recommendation. Finally, we'll recalculate the NPV of each project using a different cost of capital and determine if the ranking changes.

Let's start by organizing the cash flows for each project:

Project A:

Initial Investment: -$150,000

Year 1 Cash Flow: $60,000

Year 2 Cash Flow: $60,000

Year 3 Cash Flow: $60,000

Year 4 Cash Flow: $60,000

Project B:

Initial Investment: -$150,000

Year 1 Cash Flow: $0

Year 2 Cash Flow: $50,000

Year 3 Cash Flow: $75,000

Year 4 Cash Flow: $110,000

a. Calculate the payback period for each project:

For Project A:

Payback Period = 3 + ($30,000 / $60,000) = 3.5 years

For Project B:

Payback Period = 2 + (($150,000 - $50,000) / $75,000) = 2.67 years

b. Calculate the NPV of each project at 0%:

For Project A:

NPV = -$150,000 + $60,000 + $60,000 + $60,000 + $60,000 = $90,000

For Project B:

NPV = -$150,000 + $0 + $50,000 + $75,000 + $110,000 = $85,000

"