Calculating Net Present Value (NPV) and Payback Period (PBP) Example

A firm intends to invest in either project A or B. The expected cash flows are given below:

Year                       Project A                             Project B

0                              (2000)                                   (2000)

1                              1000                                       200

2                              800                                         600

3                              600                                         800

4                              200                                         1,200

The required cost of capital is 10%. Calculate:

  • The Payback period for each project
  • Net Present Value (NPV) for each project

Using the answers above, advise the firm on the project that they should invest in

This question was adopted from past KNEC exam. KNEC past papers provide learners with the best revision tools to prepare for exam using revision questions and answers.

Answer:

1) Payback Period

2) Net Present Value (NPV)

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