Question

1. A project that costs $26,000 today will generate cash flows of $9,000 per year for seven years. What is the project's payback period?

2.Living Colour Co. has a project available with the following cash flows:

Year	Cash Flow
0	−$35,230
1	7,940
2	9,530
3	13,490
4	15,570
5	10,280
If the required return for the project is 7.8 percent, what is the project's NPV?

Answer 1

1. Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 2 +( 8,000 / 9,000)

= 2.89 Years

Hence the correct answer is 2.89 Years

Note :

Year	Investment	Cash Inflow	Net Cash Flow
0	-26,000	-	-26,000	(Investment + Cash Inflow)
1	-	9,000	-17,000	(Net Cash Flow + Cash Inflow)
2	-	9,000	-8,000	(Net Cash Flow + Cash Inflow)
3	-	9,000	1,000	(Net Cash Flow + Cash Inflow)
4	-	9,000	10,000	(Net Cash Flow + Cash Inflow)
5	-	9,000	19,000	(Net Cash Flow + Cash Inflow)
6	-	9,000	28,000	(Net Cash Flow + Cash Inflow)
7	-	9,000	37,000	(Net Cash Flow + Cash Inflow)

2. Net Present Value = Present Value of Cash Inflows - Present Value of Cash Outflows

= [ $ 7,940 * 1/(1.078) ^ 1 + 9,530* 1/(1.078) ^ 2 +$ 13,490* 1/(1.078) ^ 3 +$ 15,570* 1/(1.078) ^ 4 +$ 10,280* 1/(1.078) ^ 5 ] - $ 35,230

= $ 9,695.91

Hence the correct answer is $ 9,695.91