# Calculate the Payback Period of Each Project

Essay by   •  May 10, 2019  •  Case Study  •  1,739 Words (7 Pages)  •  6 Views

## Essay Preview: Calculate the Payback Period of Each Project

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NAME                    : MONICA JANGARE

ID                            :  1207172005

COURSE NAME  : CORPORATE FINANCE

COURSE CODE    : FIN3433

TUTORIAL            : 1

SUBMISSION DATE :  27th DECEMBER 2018

1. The payback period is not appropriate in the analysis of the projects because it does not properly account for the time value of money, risk financing and other important considerations such as opportunity cost and it does not consider cost of the capital. It also doesn’t specify any require comparisons for taking or rejecting the project and the fact that it ignores the cash flows occurring after the payback period.

 CALCULATE THE PAYBACK PERIOD OF EACH PROJECT SYNTHETIC RESIN CASH FLOW                          CUMULATIVE CASH FLOW 0 (\$100000) (\$1000000 1 \$350000 (\$650000) 2 \$400000 (\$250000) 3 \$500000 \$250000 4 \$650000 \$900000 5 \$700000 \$16000000 payback = 2 + 250000 500000 = 2.5 years EXPOSY RESIN CASH FLOW CUMULATIVE CASH FLOW 0 (\$800000) (\$800000) 1 \$600000 (\$200000) 2 \$400000 \$200000 3 \$300000 \$500000 4 \$200000 \$700000 5 \$200000 \$900000 Payback = 1 + 200000 400000 = 1.5 years

1. No Tim should not ask the Board to use DPP as the deciding factor as it simply ignores all cash flows after the payback period. Also DPP tends to provide very little useful information even though it accounts for time value of money. This can therefore lead to rejection of good wealth creating projects.
 CALCULATE THE DISCOUNTED PAYBACK PERIOD SYNTHETIC RESIN CASH FLOW PV CASH FLOW CUMULATIVE 0 (\$1000000) (\$1000000) (\$1000000) 1 \$350000 \$318185 (\$681815) 2 \$400000 \$330560 (\$351255) 3 \$500000 \$375650 \$24395 4 \$650000 5 \$700000 payback = 2 + \$35255 = 2.94years \$375650 EXPOXY RESIN PV CASH FLOW CUMULATIVE CASH FLOW 0 (\$800000) (\$800000) (\$800000) 1 \$600000 \$545460 (\$254540) 2 \$400000 \$350560 \$76020 3 \$300000 4 \$200000 5 \$200000 payback = \$254540 = 1.77 years \$330560
1. CALCULATE THE ARR

SYNTHETIC RESIN

 YEAR 1 2 3 4 5 NI 150000 200000 300000 450000 500000 Initial investment 1000000 Salvage value 0 ARR 0.64

EXPOXY RESIN

 YEAR 1 2 3 4 5 NI 440000 240000 140000 40000 40000 Initial investment 800000 Salvage value 0 ARR 0.45

The ARR for both projects is higher than 40% so it may be difficult for Tim to make a decision since both projects will generate wealth. They would choose the EXPOXY project because it has a percentage close to 40% but the problem is that ARR is based on profits rather than cash flows and it fails to account the timing of profits.

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