The following data pertain to an investment that is being considered by the mana

Question

The following data pertain to an investment that is being considered by the management of Bayou Electrical Supply:

Discount Rate                                   10%

Project Life                                       10 years

Cost of the Investment                     $1,200,000

Annual Cash Inflows                       $240,000

Estimated Salvage Value                         0

Question A:

What is the net present value of this investment? (Show your work)

Question B:

What is the payback period for this investment? (Show your work)

Explanation / Answer

Answer:-A)- Investment’s net present value = Present value of cash inflows – Total outflows

     ={($240000*6.14457) - $1200000}

     =$1474697 - $1200000

     =$274697

B)- Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. It is one of the simplest investment appraisal techniques.

In case when cash inflow are even, the formula to calculate payback period is:

Payback period =Initial investment / Cash Inflow per period

                         =$1200000/$240000

                         = 5 years

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