Suppose a company had an initial investment of $40,000. The cash flow for the next five...

Suppose a company had an initial investment of $40,000. The cash flow for the next five years are $17,000, $19,000, $20,000, $20,000, and $14,000, respectively. The interest rate is 11%. Enter your answers rounded to 2 DECIMAL PLACES.

#1What is the discounted payback period?

#2If the firm accepts projects with discounted payback periods of less than 3 years, will the project be accepted?

Yes

No

#3What is the NPV of the project?

Expert Solution

Years	Cash flows	PV of Cash flows	Unrecoverred amount
0	-40,000		40,000
1	17,000	15315.3	24684.70
2	19,000	15420.4	9264.3
3	20,000	14624	(5359.7)
4	20,000	13174	(18533.7)
5	14,000	8309	(26842.7)

Cost of capital is given as 11%. Discounted Payback =Years until payback occurs+Unrecovered amount at the beginning of the last year/Cash flow during last year.PV of cash flows is obtained by multiplying the PV factor of 11% for the corresponding years(.9009,.8116,.7312,.6587,.5935) with the cash inflows from years 1 to 5

The payback occurs sometime between years 2 and 3.So Discounted payback period=2+9264.3/14624=2.6335 years That's 2.63 years(rounded to two decimal places)

If the firm accepts projects with payback period less than 3 years,then Yes this project will be accepted.Since it's discounted payback period is less than 3 years.

NPV =Pv of inflows -Initial Outlay

NPV can be computed using the excel function =NPV()

The formula used=NPV(11%,B3:B7)+B2 We get NPV =$26,842.91

jeff jeffy answered 2 years ago

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