In: Finance
Payback period
A) Project L costs $60,000, its expected cash inflows are $13,000 per year for 12 years, and its WACC is 9%. What is the project's payback? Round your answer to two decimal places.
B) A project has annual cash flows of $6,000 for the next 10 years and then $9,500 each year for the following 10 years. The IRR of this 20-year project is 13.03%. If the firm's WACC is 8%, what is the project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.
Answer A):
When annual cash flows are uniform;
Payback period = Initial investment / Annual cash flow = 60000 / 13000 = 4.62 years
Project's payback = 4.62 years
Answer B):
IRR of the project =13.03%
We know IRR is discount rate at which NPV = 0
This means, the present value of discounted cash flows at the rate of IRR will be equal to initial investment
Annual cash flows from year 1 to year 10 = $6000
Annual cash flows from year 11 to year 20 = $9500
The PV at the end of year 10 of cash flows from year 11 to 20 = 9500 * (1 - 1 / (1 + 13.03%) 10) / 13.03% = $51487.56515
PV at year 0 of 51487.57 = 51487.56515 /(1 + 13.03%)10 = $15127.42744
PV of cash flows from year 1 to year 10 = 6000 * (1 - 1 / (1 + 13.03%) 10) / 13.03% = $32518.4622
Hence Initial investment = PV of cash flow from year 1 to year 10 = 15127.42744 + 32518.4622 =$47,645.8896
NPV Calculations:
Initial investment = $47,645.8896
The PV at the end of year 10 of cash flows from year 11 to 20 = 9500 * (1 - 1 / (1 + 8%)10) / 8% = $63745.7733
PV at year 0 of 63745.7733 = 63745.7733/(1 + 8%)10 = $29526.6271
PV of cash flows from year 1 to year 10 = 6000 * (1 - 1 / (1 + 8%)10) / 8% = $40260.4884
Hence:
NPV = 29526.6271 + 40260.4884- 47645.8896 = $22,141.23
NPV = $22,141.23