Question

The company's required rate of return or weighted average cost of capital is 8%. After computing Payback period, NPV, PI, and IRR, state whether you would accept or reject each project. Management's arbitrarily set payback period is 2.75 years. Project Bart details; Initial Outlay = $118,736; cash inflows= Year 1 $60,000 Year 2 $50,000 Year 3 $28000. Compute NPV for Project Bart.

Answer 1

payback period :-

Cumulative cash flows :-

Years	CF	Cumulative CF
0	-118,736	-118,736
1	60000	-58,736
2(x)	50000	-8,736(y)
3	28000(z)	19,26

Payback Period is X + Y/Z

· In this calculation:

· X = is the last time period where the cumulative cash flow (CCF) was negative

· Y = is the absolute value of the CCF at the end of that period X

· Z = is the value of the DCF in the next period after X

payback period = 2 years + 8736 / 28,000

= 2 years + 0.312 years

payback period = 2.312 years

NPV :-

NPV = present value of cash inflows - initial investment

Present value of cash inflows:-

Years	CF	PVF@8%	PV of CF
1	60000	0.925926	55555.555555556
2	50000	0.857339	42866.941015089
3	28000	0.793832	22227.302748565
PV of Cash inflows	120649.799319209

NPV = 120,649.799319209 - 118,736 = $ 1913.799319209

NPV = $ 1913.80 ( Round off to two decimals)

PI :-

PI = present value of cash inflows / initial investment = 120649.799319209 / 118,736 = 1.016118105

IRR:-

Decision :-

Here payback period is below project life , NPV is positive,PI is greater than 1 and IRR is greater than WACC.

Hence NPV is positive, the project would be accepted.

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