Question

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

Rate of Return: 15%

Inflation Rate: 2%

Please note: Investment costs are taken at the start of the year and recurring costs and revenue at the end of the year.

The cash flows in the table are nominal cash flows (they have not been adjusted for inflation)

Investment:

Year	Investment Cost	Recurring Cost	Savings
0	$                 300,000
1		$            100,000	$          75,000
2		$            100,000	$        150,000
3		$            100,000	$        300,000
4		$            100,000	$        500,000
5		$            100,000	$        500,000

Answer 1

1. Calculation of NPV :-

NPV = Inflow - Outflow

where, outflow =$653,922

Year	Investment cost	Recurring Cost	Inflation@2%	Cost after inflation	Disc @ 15%	Present Value
0	$            300,000					$       300,000
1		$        100,000	$            2,000	$                 102,000	0.87	$   88,695.65
2		$        100,000	$            2,040	$                 104,040	0.76	$   78,669.19
3		$        100,000	$            2,081	$                 106,121	0.66	$   69,776.15
4		$        100,000	$            2,122	$                 108,243	0.57	$   61,888.41
5		$        100,000	$            2,165	$                 110,408	0.50	$   54,892.33

Inflow = $910,359

Year	Savings	Disc @ 15%	Present Value
1	$           75,000	0.87	$          65,217
2	$        150,000	0.76	$       113,422
3	$        300,000	0.66	$       197,255
4	$        500,000	0.57	$       285,877
5	$        500,000	0.50	$       248,588

So, NPV = $256,437

2. Calculation of Pay back period :-

Pay back period = Present Value of Inflow/ Present Value of Outflow

= 910,359/653,922

= 1.39 years