Essay About Payback Period And Analysis Of The Projects

Calculate the Payback Period of Each Project
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[pic 1]NAME                    : MONICA JANGAREID                            :  1207172005COURSE NAME  : CORPORATE FINANCECOURSE CODE    : FIN3433TUTORIAL            : 1SUBMISSION DATE :  27th DECEMBER 2018 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 FLOW0($100000)($10000001$350000($650000)2$400000($250000)3$500000$2500004$650000$9000005$700000$16000000payback =2+250000500000=2.5 yearsEXPOSY RESINCASH FLOW  CUMULATIVE CASH FLOW0($800000)($800000)1$600000($200000)2$400000$2000003$300000$5000004$200000$7000005$200000$900000Payback=1+200000400000=1.5 yearsNo 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 RESINCASH FLOW  PV CASH FLOW CUMULATIVE0($1000000)($1000000)($1000000)1$350000$318185($681815)2$400000$330560($351255)3$500000$375650$243954$6500005$700000payback=2+$35255=2.94years$375650EXPOXY RESINPV CASH FLOW CUMULATIVE CASH FLOW 0($800000)($800000)($800000)1$600000$545460($254540)2$400000$350560$760203$3000004$2000005$200000payback =$254540=1.77 years$330560CALCULATE THE ARRSYNTHETIC RESINYEAR12345NI150000200000300000450000500000Initial investment1000000Salvage value0ARR0.64EXPOXY RESINYEAR12345NI4400002400001400004000040000Initial investment800000Salvage value0ARR0.45 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.