November 18, 2012
The payback period for Option A is 7.9 years, well over the critical acceptance level of 2.75 years. The payback period for Option B is 5 years, which is a somewhat closer to the critical acceptance level. The net present value for Option A is $2,115,031.84 and the net value for Option B is $2,987,257.56. The internal rate of return ...view middle of the document...
Project B seems to be the best choice. The cumulative cash flow is greater than Option A. The net present value for Project B is almost equal to the original capital costs of the project. Benefits and returns are front loaded for Project B while Project A’s benefits are end loaded. Because Project B’s returns are front loaded, it will pay for itself much faster than Project A with much less risk involved. Operating and maintenance costs for Project B are more than Project A but the benefits far exceed the operating costs. Operating costs for Project A are less than Project B but with a slower return on investments.
In order to justify implementing both projects, the net present value of each project must be examined. Both projects have a net present value almost equal to the capital cost of the project. Project A could try to find a way to decrease its capital costs while increasing its returns at a faster rate. Some of the benefits of Project B in the first few years could be applied to Project A to help defray costs and make the payback period shorter.