10-5 ments of S1,500, S1,500, $10 a. How long will it take for Bill to recoup hi
ID: 2656712 • Letter: 1
Question
10-5
ments of S1,500, S1,500, $10 a. How long will it take for Bill to recoup his initial investment inrs b. How long will it take for Bill to recoup his initial investment in ret c. Using the payback period, which project should Bill choose? B Do you see any problems with his choice? NPV Calculate the net present value (NPV) for the following 15-yea ment on the acceptability of each. Assume that the firm has a cost of capital of 99 a. Initial investment is $1,000,000; cash inflows are $150,000 per year. b. Initial investment is $2,500,000; cash inflows are $320,000 per year. c. Initial investment is $3,000,000; cash inflows are $365,000 per year. 10-5 r projects. ConExplanation / Answer
Answer to Question P10-5
Requirement (a)
Net Present Value [NPV] = Present Value of Annual cash inflows – Initial Investment
= $150,000 x [PVIFA 9%, 15 Years] - $10,00,000
= [$150,000 x 8.060688] - $10,00,000
= $12,09,103.26 - $10,00,000
= $2,09,103.26 [Positive NPV]
Requirement (b)
Net Present Value [NPV] = Present Value of Annual cash inflows – Initial Investment
= $320,000 x [PVIFA 9%, 15 Years] - $25,00,000
= [$320,000 x 8.060688] - $25,00,000
= $25,79,420.30 - $25,00,000
= $79,420.30 [Positive NPV]
Requirement (c)
Net Present Value [NPV] = Present Value of Annual cash inflows – Initial Investment
= $365,000 x [PVIFA 9%, 15 Years] - $30,00,000
= [$365,000 x 8.060688] - $30,00,000
= $ 29,42,151.28 - $30,00,000
= - $57,848.72 [Negative NPV]
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