Question

In: Finance

You are evaluating a project that will cost $ 547 ,000​, but is expected to produce...

You are evaluating a project that will cost $ 547 ,000​, but is expected to produce cash flows of $ 127,000 per year for 10 ​years, with the first cash flow in one year. Your cost of capital is 10.7 % 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?

If you want to increase the value of the company you?(will not or will)

take the project since the NPV is? (negative or positive)

Solutions

Expert Solution

Part A:

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

PBP = Investment / CF per anum

= 547000 / 127000

= 4.31 Years

Part B:

Year CF PVF @10.7% Disc CF
0 $ -5,47,000.00         1.0000 $ -5,47,000.00
1 $ 1,27,000.00         0.9033 $ 1,14,724.48
2 $ 1,27,000.00         0.8160 $ 1,03,635.48
3 $ 1,27,000.00         0.7372 $      93,618.32
4 $ 1,27,000.00         0.6659 $      84,569.40
5 $ 1,27,000.00         0.6015 $      76,395.12
6 $ 1,27,000.00         0.5434 $      69,010.95
7 $ 1,27,000.00         0.4909 $      62,340.51
8 $ 1,27,000.00         0.4434 $      56,314.83
9 $ 1,27,000.00         0.4006 $      50,871.57
10 $ 1,27,000.00         0.3618 $      45,954.44
NPV $ 2,10,435.11

As it has +ve NPV, It will increase the Value of Company. I will consider this Project to increase the Value of Company.

NPV = PV of cash inflows - PV of Cash Outflows

=

jeff jeffy answered 7 months ago
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