Question

Consider a project with the following cash flows: $3,500 at t=1, $12,500 at t=2, $15,000 at t=3, $15,000 at t=4. The Discounted Payback Period of this project is 3.3 years. The appropriate discount rate is 11%. Find the Net Present Value of the project. (Note that the cash flow for t=0 is not provided to you.)
		A.  $6,916.67 B.  ($11,852.73) C.  ($1,627.27) D.  $4,952.58 E.  Insufficient information.

Answer 1

A.  $6,916.67

Working:

a.	Calculate cost of project
Year	Cash flow	Discount factor	Present Value	Cumulative Present Value
1	$         3,500	0.9009	$         3,153.15	$                                  3,153.15
2	$       12,500	0.8116	$      10,145.28	$                                13,298.43
3	$       15,000	0.7312	$      10,967.87	$                                24,266.30
4	$       15,000	0.6587	$         9,880.96	$                                34,147.27
Discounted Cash flow in year 4 to get Cost of investment					=	$     9,880.96	x	0.3	=	$     2,964.29
Cost of Project		=	Present Value of cash inflows in 3.3 years
		=	$      24,266.30	+	$     2,964.29
		=	$      27,230.59
b.	Calculation of Net Present Value
	Present Value of cash inflows			$ 34,147.27
	Cost of Project			$ -27,230.59
	Net Present Value			$ 6,916.68