An investment has the following cash flow with a discount rate of 10%. Year 0 Ye

Question

An investment has the following cash flow with a discount rate of 10%. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 -4000 1000 1000 1000 1000 1000 What is the Payback Period? Years = Calculate the Net Present Value (NPV). NPV = Should you make the investment?   Circle one: Yes / No / Other Why? An investment has the following cash flow with a discount rate of 10%. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 -4000 1000 1000 1000 1000 1000 What is the Payback Period? Years = Calculate the Net Present Value (NPV). NPV = Should you make the investment?   Circle one: Yes / No / Other Why?

Explanation / Answer

Payback period = Initial Cost / Annual Inflows

= $ 4,000 / $ 1,000

= 4 Years

Hence the correct answer is 4 Years

Net Present Value (NPV) = Present Value of Cash Inflows- Present Value of Cash Outflows

= $ 1,000 * 1/ (1.10) ^ 1 + $ 1,000 * 1/ (1.10) ^ 2 + $ 1,000 * 1/ (1.10) ^ 3 + $ 1,000 * 1/ (1.10) ^ 4 + $ 1,000 * 1/ (1.10) ^ 5 - $ 4,000

= $ 3,709.79 - $ 4,000

= - $ 209.21

Hence the correct answer is - $ 209.21

The correct answer is No.

This is because the NPV is negative for this project. The negative NPV implies that the Project is not profitable.

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