Question

A company will invest with an initial investment of $1,000,000. Assuming a market interest rate of 5% and cash flow for 5 years is expected in the table below:

Year	Cash Flow
1	425,000
2	384,000
3	321,500
4	282,500
5	200,000

Calculate the PAYBACK PERIOD and NPV!

Answer 1

Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year

                             = 2 years + ($1,000,000 - $809,000)/ $321,500

                             = 2 years + $191,000/ $321,500

                             = 2 years + 0.5941

                             = 2.59 years.

Net present value is solved here using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$1,000,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the market interest rate of 5%.
• Press the down arrow and CPT buttons to get the net present value.

The net present value is $419,903.69.

In case of any query, kindly comment on the solution.