The Square Box is considering two independent projects, both of which have an initial cost of $18,000. The cash inflows of Project A are $3,000, $7,000, and $10,000 over the next three years, respectively. The cash inflows for Project B are $3,000, $7,000, and $15,000 over the next three years, respectively. The required return is 12 percent and the required discounted payback period is 3 years. Based on discounted payback, which project (s), if either, should be accepted

Question

Hailie Riley

Business

29 October, 13:15

The Square Box is considering two independent projects, both of which have an initial cost of $18,000. The cash inflows of Project A are $3,000, $7,000, and $10,000 over the next three years, respectively. The cash inflows for Project B are $3,000, $7,000, and $15,000 over the next three years, respectively. The required return is 12 percent and the required discounted payback period is 3 years. Based on discounted payback, which project (s), if either, should be accepted

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Answers (1)

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Alessandra Sanders · Answer 1

The Square Box should accept Project B only

Explanation:

Square Box should decide the project whose Net present value (NPV) of future cash inflow is higher than the initial cost of investment

NPV of cash inflow from Project A = 3,000 / (1+12%) + 7,000 / (1+12%) ^2+10,000 / (1+12%) ^3 = $15,377, lower then initial cost of $18,000 → deny Project A

NPV of cash inflow from Project B = 3,000 / (1+12%) + 7,000 / (1+12%) ^2+15,000 / (1+12%) ^3 = $18,936, higher then initial cost of $18,000 → accept Project B