A project with the cash outlay now is followed by positive expected cash flows i

Question

A project with the cash outlay now is followed by positive expected cash flows in the future and a payback period less than its economic life. Is its net present value positive or negative? Explain. Now suppose that the discounted payback. Is less than the useful life of the project. Is its net present value positive or negative? Explain. A project with the cash outlay now is followed by positive expected cash flows in the future and a payback period less than its economic life. Is its net present value positive or negative? Explain. Now suppose that the discounted payback. Is less than the useful life of the project. Is its net present value positive or negative? Explain. A project with the cash outlay now is followed by positive expected cash flows in the future and a payback period less than its economic life. Is its net present value positive or negative? Explain. Now suppose that the discounted payback. Is less than the useful life of the project. Is its net present value positive or negative? Explain.

Explanation / Answer

A payback period of less than project’s life means NPV is positive or zero but for a zero discount rate. If the project has positive cash flows and also the payback period is less than the project life, then it can said that NPV is zero or positive but without discounting the cash flows.

But if we are using discounted payback period ,it means that we will be using an appropriate discount rate .If the discounted pay back period is less than the project life ,NPV in such a case may be equal to zero ,positive or negative depending upon the IRR. . If a project has a positive NPV for a certain discount rate, then it will also have a positive NPV for a zero discount rate; thus, the payback period must be less than the project life. Since discounted payback is calculated at the same discount rate as is NPV, if NPV is positive, the discounted payback period must be less than the project’s life. If NPV is positive, then the present value of future cash inflows is greater than the initial investment cost; thus PI must be greater than 1. If NPV is positive for a certain discount rate R, then it will be zero for some larger discount rate R*; thus the IRR must be greater than the required return.

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