Question

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)

Answer 1

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

=