NPV and payback period of two investment projects

Problem statement

(3 marks) The company “RORRET” plans to invest in new production facilities in order to bring Robotic Intelligence (RI) into its production processes. The initial outlay of the investment is €15,000. This investment will generate cash flows for three years, which is its useful life. Specifically: the cash flow generated at the end of the first year is €10,000; the cash flow generated at the end of the second year is 15% higher than the cash flow of the first year, and the cash flow generated at the end of the third year is 5% lower than the cash flow generated during the second year. In addition, from selling the facilities at the end of the third year, it will receive their residual value of €5,000.

Alternatively, the company can invest in another project based on Automated Processes (AP), with an initial outlay of €15,000 and constant cash flows of €12,000 in each of its three years of life.

Taking the above information into account, for a discount rate of 7% per year, determine:

a) The Net Present Value (NPV) of the Robotic Intelligence investment (0.8 marks). Is the investment project viable? Justify your answer (0.2 marks).

b) The Net Present Value (NPV) of the Automated Processes investment (0.3 marks). Which of the two projects would you choose? Justify your answer (0.2 marks).

c) Answer one of these two sub-questions:

c.1) Calculate the payback period of investment project RI (0.6 marks) and of project AP (0.6 marks). For the calculation you may use the calendar year or the commercial year. According to this criterion, which of the two projects would you select? Justify your answer (0.3 marks).

c.2) Define economic investment (0.4 marks) and financial investment (0.5 marks), and classify the following operations as economic investment or financial investment, justifying your answer (0.6 marks): – A transport company buys a new van for its deliveries. – A student uses their savings to buy 50 shares of Telefónica S.A. on the stock exchange. – A bakery uses €20,000 of its profits to buy 10-year Government Bonds.

Source: Madrid university entrance exam (PAU, Spain) · 2025-2026 · Ordinary session · Business Studies · Question 2. Official exam set by the public universities of the Community of Madrid, to whom it belongs; translated from Spanish and reproduced with its source in order to explain it for teaching purposes.