Question

You are evaluating a project that will cost $ 522 ,000​, but is expected to produce cash flows of $ 121,000 per year for 10 ​years, with the first cash flow in one year. Your cost of capital is 11.1 % and your​ company's preferred payback period is three years or less.

a. What is the payback period of this​ project?

b. Should you take the project if you want to increase the value of the​ company?

Answer 1

Payback period = Iitial Investment / CF per anum

= $ 522,000 / $ 121,000

= 4.31 Years

NPV = PV of Cash Inflows - PV of Cash Outflows

Year	CF	PVF @11.1%	Disc CF
0	$ -5,22,000.00	1.0000	$ -5,22,000.00
1	$ 1,21,000.00	0.9001	$ 1,08,910.89
2	$ 1,21,000.00	0.8102	$      98,029.60
3	$ 1,21,000.00	0.7292	$      88,235.47
4	$ 1,21,000.00	0.6564	$      79,419.86
5	$ 1,21,000.00	0.5908	$      71,485.03
6	$ 1,21,000.00	0.5318	$      64,342.96
7	$ 1,21,000.00	0.4786	$      57,914.45
8	$ 1,21,000.00	0.4308	$      52,128.22
9	$ 1,21,000.00	0.3878	$      46,920.09
10	$ 1,21,000.00	0.3490	$      42,232.30
NPV			$ 1,87,618.88

As it has +ve NPV, it will increase Value of the company.