Question: 1. Payback Analysis
Two new wind-farm tower projects are proposed for a small company that installs them in south western Pennsylvania. Project A will cost $250,000 to complete and is expected to have an annual net cash flow of $75,000. Project B will cost $150,000 to complete and should generate annual net cash flows of $52,000. As a small company, the owner and senior management team are very concerned about their cash flow.
Use the payback period method and determine which project is better from a cash flow standpoint.
Show your work and include any formulas used to calculate PP.
2. Net Present Value
A recent project nominated for consideration at your company has a four-year cash flow of $20,000; $25,000; $30,000; and $50,000. The cost of the project is $75,000.
a. If the required rate of return is 20%, conduct a discounted cash flow calculation to determine the NPV.
b. What is the benefit-cost ratio for the project?
c. What would the NPV of the above project be if the inflation rate was expected to be 4% in each of the next four years?
You will be assessed on the correctness of your calculations (40 points) and on presenting your work and results in a professional manner.