Question
In: Finance
you are the cfo of xyz co. that prints textbooks using an outdated system. the owner...
you are the cfo of xyz co. that prints textbooks using an outdated system. the owner provides you with the following information about a new project "alpha" that will last for 7 years. the project requires a new machine that costs 100,000 today. the project will not generate any cash flow at time 1. in years 2 and 3 annual cash flows is 25,000. in years 4 and 5 annual cash flow is 30000 in year 6 it is -10,000 and in year 7 it is 60,000. the required rate of return is 6%.
what is the payback period?
what is the discounted payback period?
what is the NPV of the project?
Solutions
Expert Solution
a). Calculating the Payback Period for the Project:-
| Year | Cash Flows of Project ($) | Cummulative Cash Flows of Project ($) |
| 0 | (100,000.00) | (100,000.00) |
| 1 | - | (100,000.00) |
| 2 | 25,000.00 | (75,000.00) |
| 3 | 25,000.00 | (50,000.00) |
| 4 | 30,000.00 | (20,000.00) |
| 5 | 30,000.00 | 10,000.00 |
| 6 | (10,000.00) | - |
| 7 | 60,000.00 | 60,000.00 |
| 60,000.00 |
- Payback Period = Years before the Payback period occurs + (Cummulative cash flow in the year before recovery/Cash flow in the year before recovery)
= 4 years + [(20,000/30,000)*12 months]
= 4 years & 8 months
b). Calculating the Discounted Payback Period:-
| Year | Cash Flows of Project ($) | PV Factor @6.00% | Present Value of Project ($) | Cummulative Discounted Cash Flows of Project ($) |
| 0 | (100,000.00) | 1.0000 | (100,000.00) | (100,000.00) |
| 1 | - | 0.9434 | - | (100,000.00) |
| 2 | 25,000.00 | 0.8900 | 22,249.91 | (77,750.09) |
| 3 | 25,000.00 | 0.8396 | 20,990.48 | (56,759.61) |
| 4 | 30,000.00 | 0.7921 | 23,762.81 | (32,996.80) |
| 5 | 30,000.00 | 0.7473 | 22,417.75 | (10,579.05) |
| 6 | (10,000.00) | 0.7050 | (7,049.61) | (17,628.66) |
| 7 | 60,000.00 | 0.6651 | 39,903.43 | 22,274.77 |
| 60,000.00 | 22,274.77 |
- Discounted Payback Period = Years before the Discounted Payback period occurs + (Cummulative cash flow in the year before recovery/Discounted Cash flow in the year before recovery)
= 6 years + [(17,628.66/39,903.43)*12 months]
= 6 years & 5 months
c). Calculating the NPV of the Project:-
| Year | Cash Flows of Project ($) | PV Factor @6.00% | Present Value of Project ($) |
| 0 | (100,000.00) | 1.0000 | (100,000.00) |
| 1 | - | 0.9434 | - |
| 2 | 25,000.00 | 0.8900 | 22,249.91 |
| 3 | 25,000.00 | 0.8396 | 20,990.48 |
| 4 | 30,000.00 | 0.7921 | 23,762.81 |
| 5 | 30,000.00 | 0.7473 | 22,417.75 |
| 6 | (10,000.00) | 0.7050 | (7,049.61) |
| 7 | 60,000.00 | 0.6651 | 39,903.43 |
| 60,000.00 | 22,274.77 |
So, NPV of the Project is $22,274.77
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jeff jeffy answered 1 year agoRelated Solutions
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