Question

In: Finance

A 3-year project requires an initial investment of $100 million (CF0=-100), and will return cash infows...

A 3-year project requires an initial investment of $100 million (CF0=-100), and will return
cash infows of $70 million, $50 million, and $20 million at the end of the years 1, 2, and
3, respectively. Assuming a weighted average cost of capital of 10%, what is the discounted
payback period for this project?

(Please show work and explain on paper)

Solutions

Expert Solution

Discounted Payback period is the time it takes for the initial cost of a project to equal to discounted value of cash inflows.

Calculation of Discounted Payback Period

Firstly will calculate Present Value of Cash Flows and then each such cash flows are added together i.e.cumulative cash flows.

Year Cash Flows Present Value Factor
@10%		 Present Value of Cash Flows Present Value Cumulative Cash Flows
0 $(100)MM 1 $(100)MM $(100)M
1 $70MM 0.9091 $63.637MM $(36.363)MM
(100 - 63.637)
2 $50MM 0.8264 $41.32MM $4.957MM
(-36.363+41.32)
3 $20MM 0.7513 $15.026MM $19.983MM

From the above table, it can be seen that initial investment is recovered between Year 1 and Year 2

Payback Period = P + PVCCF / PVCF

where,
P = last Time Period where the Present Value Cumulative Cash flows was negative
PVCCF = Present Value Cumulative Cash flows of period P
PVCF = Present Value of Cash Flows of period following the period P

Payback Period = P + PVCCF / PVC
= Year 1 + $36.363MM / $41.32MM
= 1 + 0.8800
= 1.88 years

Ans : Discounted Payback period for this project is 1.88 years.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

3. A 5-year project requires an initial investment of $28 million. It generates an annual cash...
3. A 5-year project requires an initial investment of $28 million. It generates an annual cash flow of $9 million. The unlevered cost of equity is 20%. A loan of $22.5 million at a rate of 10%. Principal will be repaid in a lump sum when project ends. However, the lender will extend the loan for only three years. The firm’s tax rate is 30%. Calculate the project’s adjusted present value.
A Corporation is deciding whether to engage in a 2-year project that requires an initial cash outflow of I (CF0) = $2,000,000
A Corporation is deciding whether to engage in a 2-year project that requires an initial cash outflow of I (CF0) = $2,000,000. CF1 is expected to be a cash inflow of $4,670,000 and CF2 is expected to be another cash outflow of $2,722,500. Altogether there are three cash flows—an initial cash outflow, followed by a cash inflow, followed by a second cash outflow at the end of the 2-year project life.A. Determine the multiple IRR’s by plotting the project’s NPV...
A project requires an initial investment of $1.2 million. It expects to generate a perpetual cash...
A project requires an initial investment of $1.2 million. It expects to generate a perpetual cash flow. The first year cash flow is expected at $100,000. The cash flows are then expected to grow at 1.25% forever. If the cost of capital for this project is 11%, what is the project's NPV? Group of answer choices -$0.480 million $0.265 million $7,177 million -$0.174 million -$0.265 million $0.174 million
A project requires an initial investment of $1.2 million. It expects to generate a perpetual cash...
A project requires an initial investment of $1.2 million. It expects to generate a perpetual cash flow. The first year cash flow is expected at $100,000. The cash flows are then expected to grow at 1.25% forever. The appropriate cost of capital for this project is 11%. What is the project's IRR and should it be accepted based on the IRR rule? Group of answer choices IRR is 9.6%; project should not be accepted IRR is 9.6%; project should be...
A project requires an initial investment of $350,000 and will return $140,000 each year for six...
A project requires an initial investment of $350,000 and will return $140,000 each year for six years. Factors: Present Value of $1 Factors: Present Value of an Annuity (r = 10%) (r = 10%) Year 0 1.0000 Year 1 0.9091 Year 1 0.9091 Year 2 0.8264 Year 2 1.7355 Year 3 0.7513 Year 3 2.4869 Year 4 0.6830 Year 4 3.1699 Year 5 0.6209 Year 5 3.7908 Year 6 0.5645 Year 6 4.3553 If taxes are ignored and the required...
A project requires an initial investment of $350,000 and will return $140,000 each year for six...
A project requires an initial investment of $350,000 and will return $140,000 each year for six years. Factors: Present Value of $1 Factors: Present Value of an Annuity (r = 10%) (r = 10%) Year 0 1.0000 Year 1 0.9091 Year 1 0.9091 Year 2 0.8264 Year 2 1.7355 Year 3 0.7513 Year 3 2.4869 Year 4 0.6830 Year 4 3.1699 Year 5 0.6209 Year 5 3.7908 Year 6 0.5645 Year 6 4.3553 If taxes are ignored and the required...
An investment project requires an initial cost of $100. The project will provide $ 25 in...
An investment project requires an initial cost of $100. The project will provide $ 25 in the first year and $110 in the second year. What is the NPV of the project if the discount rate is 10%? $ 1.13 $ 13.64 $ 35 $ 3.35
Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows...
Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows of $2, $4 and $5 million in years 1, 2 and 3. Assuming the company's WACC is 10%, which of the following statements is true? a. The firm should reject the project, as the IRR is lower than the WACC. b. The firm should accept the project, as the IRR is higher than the WACC. c. The firm should accept the project, as the...
Assume a new project requires an initial investment of $6 million dollars, with ensuing cash flows...
Assume a new project requires an initial investment of $6 million dollars, with ensuing cash flows of $1, $3 and $5 million in years 1, 2 and 3. Assuming the company's WACC is 10%, which of the following statements is true? a.) The firm should accept the project, as the IRR is lower than the WACC. b.) The firm should reject the project, as the IRR is higher than the WACC. c.) The firm should accept the project, as the...
Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows...
Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows of $2, $4 and $5 million in years 1, 2 and 3. Assuming the company's WACC is 10%, which of the following statements is true? The firm should reject the project, as the IRR is lower than the WACC. The firm should accept the project, as the IRR is higher than the WACC. The firm should accept the project, as the NPV is positive....
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT