Question

Calculate the Net Present Value and Pay-Back Period for the below Investment (please show ALL calculations):

Rate of Return: 15%

Inflation Rate: 2%

Year	Investment Cost	Recurring Cost	Savings	Residual Value
1	$           6,500,000
1		$           300,000	$ 1,300,000
2		$           200,000	$ 2,000,000
3		$           125,000	$ 3,500,000
4		$           125,000	$ 4,000,000
5		$           125,000	$ 5,000,000	$                      3,500,000

Please note: all investment costs will be assumed to occur at the beginning of the year and all recurring costs and revenues at the end of the year

Answer 1

Nominal rate of return: 15%
Inflation rate: 2%
Real rate of return = (1+Nominal rate) / (1+Inflation rate0 - 1
		(1.15 / 1.02) - 1 = 12.75%
NPV at 12.75%
Year	Cashflows	PVF at 12.75%		Present value
0	-6500000	1		-6500000
1	1000000	0.886918		886918
2	1800000	0.786623		1415922
3	3375000	0.69767		2354638
4	3875000	0.618776		2397759
5	8375000	0.548804		4596233
Net present value				5151470
Note:
Cashoutflows in the beginning of Year-1 means at Year-0
Cashflows of each eayr is computed as Savings less recurring cost
Cashflows of last year i.e. Year-5 = Savings-Recurring cost +Salvage
Payback period
Year	Cashflows	Cumulative CF
0	-6500000	-6500000
1	1000000	-5500000
2	1800000	-3700000
3	3375000	-325000
4	3875000	3550000
5	8375000	11925000
Payback = 3 years + 325000 /3875000 = 3.084 years