Consider the new product launch project that Kerring-Sloan is considering. The PTA-09 project is a proposed...

Consider the new product launch project that Kerring-Sloan is considering. The PTA-09 project is a proposed EV Fishing Boat that requires an initial investment of $2,600,000 in production infrastructure in 2020 (year 0) for production to begin in 2021. Cash flows for the project for years 0 - 8 are shown below. The introduction of a new product at year 9 will terminate further cash flows from this project. Assume a cost of capital of 9% where necessary to solve the following problems.

Year		PTA-09
0		-$2,600,000
1		$520,000
2		$850,000
3		$985,000
4		$925,000
5		$770,000
6		$500,000
7		$100,000
8		$55,000

1- What is the discounted Payback Period for project PTA-09?

a) 4.10 years

b) 2.95 years

c) 4.56 years

d) 3.26 years

e) 3.99 years

2- Continuing with the new product launch project that Kerring-Sloan is considering, what is the NPV of the PTA-09 project?

a) $1,886,764

b) $782,027

c) $3,486,663

d) $889,273

Solutions

Expert Solution

Discounted Payback Period is the amount of time it takes to recover the initial cost of investments using time value of money.

Year	Cash Flows	Discount Factor @ 9%	Present Value of Cash Flows	Cumulate Present Value of Cash flows
0	- $2,600,000	1	- $2,600,000	- $2,600,000
1	$520,000	0.9174	$477,064.22	- $2,122,935.78
2	$850,000	0.8417	$715,427.99	- $1,407,507.79
3	$985,000	0.7722	$760,600.73	- $646,907.06
4	$925,000	0.7084	$655,293.32	$8,386.26
5	$770,000	0.6499	$500,447.17	$508,833.43
6	$500,000	0.5963	$298,133.66	$806,967.09
7	$100,000	0.5470	$54,703.42	$861,670.52
8	$55,000	0.5019	$27,602.65	$889,273.16
NPV	$889,273.16

i) Discounted Payback period

PBP = t + (CCF for period t / PVCF for period following t)

where,

t = Year in which Cumulative present value cash flow was last negative
CCF for Period t = Cumulative Present Value Cash Flow of Period t
PVCF = Present value Cash flow for period following period t

Discounted PBP = Year 3 + ($646,907.06 / $655,293.32)
= 3 + 0.99
= 3.99 years

Ans : The Discounted Payback Period for Project PTA-09 is 3.99 years.

2) Net Present Value (NPV)

Net Present Value is the difference between Present Value of Cash Inflows and Present Value of Cash Outflows.

Ans : From the above table, NPV of the PTA-09 project is $889,273.

jeff jeffy answered 2 years ago

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