Question

A project has an annual cash flow of $8000 for first 10 years and $11000 for the next 10 years, the cost of total investment was $90,000. The company’s WACC is 10% and IRR is 14%. What is the project’s payback and NPV?

Answer 1

NPV = PV of Cash Inflows - PV of Cash outflow

Year	CF	PVF @10%	Disc CF
0	$ -90,000.00	1.0000	$ -90,000.00
1	$    8,000.00	0.9091	$    7,272.73
2	$    8,000.00	0.8264	$    6,611.57
3	$    8,000.00	0.7513	$    6,010.52
4	$    8,000.00	0.6830	$    5,464.11
5	$    8,000.00	0.6209	$    4,967.37
6	$    8,000.00	0.5645	$    4,515.79
7	$    8,000.00	0.5132	$    4,105.26
8	$    8,000.00	0.4665	$    3,732.06
9	$    8,000.00	0.4241	$    3,392.78
10	$    8,000.00	0.3855	$    3,084.35
11	$ 11,000.00	0.3505	$    3,855.43
12	$ 11,000.00	0.3186	$    3,504.94
13	$ 11,000.00	0.2897	$    3,186.31
14	$ 11,000.00	0.2633	$    2,896.64
15	$ 11,000.00	0.2394	$    2,633.31
16	$ 11,000.00	0.2176	$    2,393.92
17	$ 11,000.00	0.1978	$    2,176.29
18	$ 11,000.00	0.1799	$    1,978.45
19	$ 11,000.00	0.1635	$    1,798.59
20	$ 11,000.00	0.1486	$    1,635.08
NPV			$-14,784.50

Payback period is the period in which initial investment is recovered.

Year	Opening Bal	CF	Bal To be recovered
1	$ 90,000.00	$   8,000.00	$                82,000.00
2	$ 82,000.00	$   8,000.00	$                74,000.00
3	$ 74,000.00	$   8,000.00	$                66,000.00
4	$ 66,000.00	$   8,000.00	$                58,000.00
5	$ 58,000.00	$   8,000.00	$                50,000.00
6	$ 50,000.00	$   8,000.00	$                42,000.00
7	$ 42,000.00	$   8,000.00	$                34,000.00
8	$ 34,000.00	$   8,000.00	$                26,000.00
9	$ 26,000.00	$   8,000.00	$                18,000.00
10	$ 18,000.00	$   8,000.00	$                10,000.00
11	$ 10,000.00	$ 11,000.00	$                 -1,000.00
12	$   -1,000.00	$ 11,000.00	$              -12,000.00
13	$ -12,000.00	$ 11,000.00	$              -23,000.00
14	$ -23,000.00	$ 11,000.00	$              -34,000.00
15	$ -34,000.00	$ 11,000.00	$              -45,000.00
16	$ -45,000.00	$ 11,000.00	$              -56,000.00
17	$ -56,000.00	$ 11,000.00	$              -67,000.00
18	$ -67,000.00	$ 11,000.00	$              -78,000.00
19	$ -78,000.00	$ 11,000.00	$              -89,000.00
20	$ -89,000.00	$ 11,000.00	$           -1,00,000.00

Payback period = Year in which lease +ve Bal to be recovered + [ Bal to be recovered at that year / CF of Next Year ]

= 10 + 10000 / 11000

= 10 + 0.91

= 10.91 Years