Question

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

Answer 1

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.