Question

Lotus Company is considering an investment project that is expected to generate after tax cash flows $500 for the first year, $500 for the second year, $800 for the third year, and $800 for the fourth year. The initial investment is $1400. The firm has a cost of capital of 15%. (Keep your answer to only two decimals) a. What is the payback period for the investment ? (example of answer format: 15.42 years, or 15.42) b. What is the discounted payback period for the investment ? (example of answer format: 15.42 years or 15.42) c. What is NPV for the investment ? (example of answer format: $1,000.00 or -$1,000.00)

Answer 1

a.

Year	Cash flows	Cumulative Cash flows
0	(1400)	(1400)
1	500	(900)
2	500	(400)
3	800	400
4	800	1200

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=2+(400/800)=2.5 years

b.

Year	Cash flow	Present value@15%	Cumulative Cash flow
0	(1400)	(1400)	(1400)
1	500	434.78	(965.22)
2	500	378.07	(587.15)
3	800	526.01	(61.14)
4	800	457.40	396.26(Approx).

Hence discounted Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=3+(61.14/457.40)

=3.13 years(Approx).

3.

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

500/1.15+ 500/1.15^2+800/1.15^3+800/1.15^4

=$1796.27(Approx)

NPV=Present value of inflows-Present value of outflows

=$1796.27-$1400

=$396.27(Approx).