The following data are given for two mutually exclusive project proposals:

(PHP) Project A Project B

Initial Investment 50,000.00 60,000.00
Annual Net Cash Inflows:
Year 1 15,000.00 30,000.00
Year 2 14,000.00 14,000.00
Year 3 12,000.00 10,000.00
Year 4 12,000.00 10,000.00
Year 5 12,000.00 10,000.00

Assuming that the firm’s required rate of return is 20%, compute the following:
a) Net Present Value
b) Payback Period

Which project would you undertake? Justify.

Net Present Value:

Project A
Series of Future PV Factor of Php1.00 PV of Php1.00 for
Period Values (Php) at 20% each amount (Php)
Year 1 15,000.00 0.8333 12,499.50
Year 2 14,000.00 0.6944 9,721.60
Year 3 12,000.00 0.5787 6,944.40
Year 4 12,000.00 0.4823 5,787.60
Year 5 12,000.00 0.4019 4,822.80
2.99 39,775.90

NPV = Initial Investment – Total PV

= Php 50,000.00 – 39,775.90
= 10,224.10
Therefore: project is acceptable since NPV is positive.

Project B
Series of Future PV Factor of Php1.00 PV of Php1.00 for
Period Values (Php) at 20% each amount (Php)
Year 1 30,000.00 0.8333 24,999.00
 Year 2 14,000.00 0.6944 9,721.60
Year 3 10,000.00 0.5787 5,787.00
Year 4 10,000.00 0.4823 4,823.00
Year 5 10,000.00 0.4019 4,019.00
2.99 49,349.60

NPV = Initial Investment – Total PV

= Php 60,000.00 – 49,349.60
= 10,650.40
Therefore: project is acceptable since NPV is positive.

Payback Period:

Year Amount (Php) Year Amount (Php)

Initial Investment = Php 50,000.00
1 15,000.00
2 + 14,000.00 = 29,000.00
3 + 12,000.00 = 41,000.00
4 + (¾) 12,000.00 = 50,000.00
PP = 3.75 years
Initial Investment = Php 60,000.00
1 30,000.00
2 + 14,000.00 = 44,000.00
3 + 10,000.00 = 54,000.00
4 + (3/5) 10,000.00 = 60,000.00
PP = 3.6 years

Therfore:
Both projects are acceptable when using the NPV test. Project B has the advantage of a
shorter Payback Period of only 3.6 years compared to Project A which has a Payback Period
of 3.75 years. Base on the above tests, Project B would be the desirable project because of
its shorter payback period advantage.

On the other hand, I would prefer Project A over Project B because;

a) Project A requires lesser Initial Investment;
b) Project A has a profit of Php15,000.00 after the end of 5 years compared to Project B’s
Php 14,000.00; and
c) while Project B has a shorter payback period, I don’t find it too significant (less than 2
months) especially when factoring in the above two reasons.