Your Answers Should Be Complete; Show Your Calculations

Your Answers Should Be Complete Show Your Calculations And Supported

Your answers should be complete (show your calculations) and supported by the concepts studied in this session. 1. Two new software development projects are proposed to a young, start-up company. The Alpha project will cost $300,000 to develop and is expected to have annual net cash flow of $40,000. The beta project will cost $200,000 to develop and is expected to have annual net cash flow of $40,000. The company is very concerned about their cash flow. Using the payback period method, which project is better from a cash flow standpoint? Why? 1. A five-year project has a projected net cash flow of $25,000, $35,000, $40,000, $25,000, and $20,000 in the next five years. It will cost $60,000 to implement the project. If the required rate of return is 15%, conduct a discounted cash flow calculation to determine the NPV. Q QQuest

Paper For Above instruction

Introduction

In evaluating investment opportunities, companies often rely on financial analysis tools to determine which projects to pursue. Two common methods are the payback period and net present value (NPV). The payback period provides insights into cash flow recovery time, which is especially critical for startups concerned about liquidity. Conversely, NPV considers the time value of money, generating a more comprehensive assessment of profitability. This paper analyzes two project proposals—the Alpha and Beta projects—using the payback period method, and evaluates a separate project using discounted cash flow to determine its NPV, thereby illustrating different approaches in capital budgeting.

Analysis of Alpha and Beta Projects Using the Payback Period

The first analysis compares the Alpha and Beta projects based on their payback period, a measure of how quickly initial investments are recovered from cash inflows. The Alpha project requires an initial investment of $300,000 and yields $40,000 annually. Its payback period is calculated as:

Payback period = Initial investment / Annual cash flow = $300,000 / $40,000 = 7.5 years

Similarly, the Beta project requires $200,000 and produces the same annual cash flow of $40,000:

Payback period = $200,000 / $40,000 = 5 years

From a cash flow standpoint, the Beta project recovers its original investment faster—within 5 years compared to 7.5 years for Alpha. For a startup concerned with maintaining liquidity and avoiding cash shortages, the shorter payback period of Beta makes it more attractive. This method emphasizes liquidity and risk mitigation, which are pivotal considerations during early growth stages.

Analysis of the Discounted Cash Flow and NPV Calculation

The second scenario involves a five-year project with variable cash inflows, requiring an NPV calculation at a 15% discount rate. The cash flows are as follows:

  • Year 1: $25,000
  • Year 2: $35,000
  • Year 3: $40,000
  • Year 4: $25,000
  • Year 5: $20,000

The initial investment is $60,000. To compute the NPV, each year's cash flow must be discounted back to present value:

PV = Future cash flow / (1 + r)^t

where r = 0.15 and t = year number.

Calculations:

Year 1

PV = $25,000 / (1 + 0.15)^1 = $25,000 / 1.15 ≈ $21,739

Year 2

PV = $35,000 / (1.15)^2 = $35,000 / 1.3225 ≈ $26,464

Year 3

PV = $40,000 / (1.15)^3 = $40,000 / 1.5209 ≈ $26,301

Year 4

PV = $25,000 / (1.15)^4 = $25,000 / 1.7490 ≈ $14,290

Year 5

PV = $20,000 / (1.15)^5 = $20,000 / 2.0114 ≈ $9,941

Total present value of inflows:

PV total = $21,739 + $26,464 + $26,301 + $14,290 + $9,941 ≈ $98,735

The NPV is calculated as:

NPV = Total PV inflows – Initial investment = $98,735 – $60,000 = $38,735

Since the NPV is positive ($38,735), the project is financially viable and is expected to add value to the company.

Conclusions

The analysis demonstrates that from a cash flow perspective, the Beta project is preferable due to its shorter payback period, which is vital for a start-up aiming to maintain liquidity and minimize cash flow risks. The discounted cash flow analysis of the second project reveals a positive NPV, suggesting that this project should be undertaken as it is expected to generate value exceeding the initial investment, considering the time value of money. Employing both methods offers a comprehensive approach to decision-making—prioritizing liquidity in early-stage projects through payback period metrics and evaluating long-term profitability via NPV.

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