4. What is the payback period of the following project? Initial Investment: $60,
ID: 2638481 • Letter: 4
Question
4. What is the payback period of the following project?
Initial Investment: $60,000
Projected life: 7 years
Net cash flows each year: $14,000
6. What is the discounted payback period of the project in Question 4, assuming your cost of capital is 7%?
Initial Investment: $60,000
Projected life: 8 years
Net cash flows each year: $15,000
8. Your firm is looking at a new investment opportunity, Project Z, with net cash flows as follows:
---- Net Cash Flows ----
Project Z
Initial Cost at T-0 (Now) ($100,000)
cash inflow at the end of year 1 50,000
cash inflow at the end of year 2 40,000
cash inflow at the end of year 3 30,000
Calculate project Z's Net Present Value (NPV), assuming your firm
Explanation / Answer
4. Payback Period= Initial Outflow/Annual Cash Flow, = 60000/14000=4.28
6. Discounted Payback Period= ln(1/1-Initial Outflow*Rate/Annual Cash Flow)/ln(1+Rate)
DPP= (1/1-(60000*0.07)/14000/ln(1.07)=ln(1.43)/ln(1.07)=5.286
8. Project Z NPV= 50000/1.08+40000/(1.08*1.08)+30000/(1.08*1.08*1.08)-100000
=46296.30+34293.55+23814.97-100000
=$4404.82
10.profitibilty Idex
=PV of Future Cash flows/Intial outflow= 104404.82/100000=1.044
11.Project Z @5%
=50000/1.05+40000/(1.05*1.05)+30000/(1.05*1.05*1.05)-100000
=9815.36
Project Z @10%
=50000/1.10+40000/(1.10*1.10)+30000(1.10*1.10*1.10)-100000
=1051.84
Project N @5%
=50000/1.05+40000(1.05*1.05)+30000(1.05*1.05*1.05)-2000000
=13432.68
Project N @10%
=50000/1.10+40000/(1.10*1.10)+30000/(1.10*1.10*1.10)-2000000
=-8940.65
therefore if cost of capital is 5% project N is better than project z in terms of NPV value, and if cost of capital is 10% then project Z is acceptable as project n is giving negative NPV.
13. IRR,
total net cash infow= $420000
total cash outflow=$350000
net flow= $70000
irr=9.96%
14.Mirr= cube root of (terminal value/intial outflow)-1
terminal value= 150000*(1.08)^(3-1)+140000*(1.08)^(3-2)+130000*(1.08)^(3-3)
=171735+149800+130000=451535
outflow=350000
cube root of (451535/350000)-1
=cube root of (1.2901)-1
=1.088615-1=8.86%
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