Fin – recycle paper company

Recycle Paper Company utilizes the payback method to evaluate investment proposals. It is presently considering two investment opportunities: 

Investment A 
Net Investment = $1,000,000 

Year Expected Cash Inflows 
1 $25,000 
2 $25,000 
3 $25,000 
4 $25,000 
5 $25,000
6 $10,000
7 $5,000

Investment B 
Net Investment = $500,000 

Year Expected Cash Inflows 
1 $125,000 
2 $250,000 
3 $300,000 
4 $225,000 
5 $100,000 
6 $25,0000
7 $0

(a) Compute the payback period for Investments.
(b) If the firm utilized a payback cutoff standard of three years which, if either, of the investments would be acceptable? Why?
As a recent employee of Recycle Paper Co (above), you recognize the deficiencies of the payback method. After deriving the firm’s required rate of return (cost of capital), you desire to illustrate alternative approaches to your boss.
(c) Assuming a cost of capital of 14%, calculate the NPV of investment proposals A and B.
(d) Should recycle accept either of the investment proposals? Why?

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