Question

XYZ Company will invest with an initial investment of $ 1 million. The assumption of a market interest rate of 5% and cash flow for 5 years is expected as in the table below:

year	Cash Flow
1	425.000
2	384.000
3	321.500
4	282.500
5	200.000

Calculate the payback period and Net Present Value (NPV)

Answer 1

Payback period

Payback period = The year in which the cumulative cash flow was last negative + (the positive value of the cumulative cash flow in that year) / (cash flow in the next year)

Payback period = 2 + 191,000/321,500

Payback period = 2.5940902022 Years

Screenshot with formulas

NPV = -Initial investment + CF1/(1 + r)^1 + CF2/(1 + r)^2 + CF3/(1 + r)^3 + CF4/(1 + r)^4 + CF5/(1 + r)^5

NPV = -1,000,000 + 425,000/(1 + 0.05)^1 + 384,000/(1 + 0.05)^2 + 321,500/(1 + 0.05)^3 + 282,500/(1 + 0.05)^4 + 200,000/(1 + 0.05)^5

NPV = -1,000,000 + 404,761.9047619048 + 348,299.3197278912 + 277,723.7879278696 + 232,413.4491287067 + 156,705.2332936918

NPV = $419,903.69484

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