Capital budgeting Sheet 2

Q1. Calculate NPV and payback period for project Gold and Project Silver.

Year Gold Silver

Initial investment 50000 50000
1 5000 40000
2 5000 2000
3 40000 8000
4 10000 10000
5 10000 10000

Q2. Calculate NPV and payback period for Project X and Project Y

Year X Y
Initial investment 10000 10000
1 5000 3000
2 5000 4000
3 1000 3000
4 100 4000
5 100 3000

Q3. ABC Ltd. is a medium sized metal fabricator that is currently contemplating two
projects: Project A requires an initial investment of Rs. 42,000, project B an initial
investment of Rs. 45,000. Calculate NPV and payback.

Year A B
Initial investment 42000 45000
1 14000 28000
2 14000 12000
3 14000 10000
4 14000 10000
5 14000 10000

Q4. SK Manufacturing Company uses discounted payback period to evaluate

investments in capital assets. The company expects the following annual cash flows
from an investment of $3,500,000:

Year Cash flow

Initial investment 3500,000
1 900000
2 900000
3 900000
4 900000
5 900000
6 900000
 7 900000
8 900000

No salvage/residual value is expected. The company’s cost of capital is 12%.

1. Compute discounted payback period of the investment.

2. Is the investment desirable if the required payback period is 4 years or less.

Q4. Mr. A is considering to invest in a business.

The business will cost $100,000 to set up and is expected to generate the following
yearly net cash flows:

Year Cash flow

Initial investment 100,000
1 (20000)
2 30000
3 35000
4 40000
5 150000

The cost of capital is 10%.

Calculate the discounted payback period and comment on your answer.