Question

Your company is considering an expansion project, with projected cash flows as listed below. The CFO has asked you to compute the NPV & IRR for the project, as well as the discounted payback period. She tells you that she knows there are problems with the payback criteria, but the discounted payback period remedies these problems. Use a discount rate of 12%, and a discounted payback period cutoff of 4 years. Discuss your decision. Year Cash flow 0 $(450,000) 1 $150,000 2 $120,000 3 $100,000 4 $90,000 5 $90,000 6 $55,000 7 $125,000

Answer 1

Year	Cash flows	Discounting factor	Present values
1	150000	0.892857143	$133,928.57
2	120000	0.797193878	$95,663.27
3	100000	0.711780248	$71,178.02
4	90000	0.635518078	$57,196.63
5	90000	0.567426856	$51,068.42
6	55000	0.506631121	$27,864.71
7	125000	0.452349215	$56,543.65
Total of present values	$493,443.27
Less : Initial Investment	$450,000.00
NPV	$43,443.27

Year	Cash flows	Discounting factor	Present values	Cummulative Present values
1	150000	0.892857143	$133,928.57	$133,928.57
2	120000	0.797193878	$95,663.27	$229,591.84
3	100000	0.711780248	$71,178.02	$300,769.86
4	90000	0.635518078	$57,196.63	$357,966.49
5	90000	0.567426856	$51,068.42	$409,034.91
6	55000	0.506631121	$27,864.71	$436,899.62
7	125000	0.452349215	$56,543.65	$493,443.27

Discounted payback period = 6 + ( 450000 - 436899.62) / 56543.65

= 6.43

CF0	CF1	FR1	CF2	FR2	CF3	FR3	CF4	FR4	CF5	FR5	CF6	FR6	CF7	FR7	IRR<CPT
-450000	150000	1	120000	1	100000	1	90000	1	90000	1	55000	1	125000	1	15.32

Decision to accept / reject the project

NPV	Yes
IRR	Yes
Discounted Payback	No