Question

what is the net present value of a project with the following after tax cash flows using a discount rate of 10% year 0 45,000 year 1 14,000 year 2 14,000 year 3 10,000 year 4 10,000 year 5 8,000

would you accept the project? ehat is payback period? what is the profitbility index?

Answer 1

PV of outflows = 45,000

PV of inflows:

Year	Cashflow	PVF @ 10%	Present Value
1	14000	0.909	12,727.27
2	14000	0.826	11,570.25
3	10000	0.751	7,513.15
4	10000	0.683	6,830.13
5	8000	0.621	4,967.37
	PV of inflows		43,608.17

NPV = PV of inflows - PV of outflows = 43608.17 - 45000 = (-$1391.83)

Since, NPV is less than zero, project should not be accepted.

Profitability Index = PV of inflows / PV of outflows = 43,608.17 / 45,000 = 0.969

Payback period is period during which entire initial investment in recovered.

Year	Cashflow	Cumulative cashflow
1	14000	14000
2	14000	28000
3	10000	38000
4	10000	48000
5	8000	56000

Since, initial investment of 45000 is fully recovered somewhere in year 4, Payback period must be between year 3 and year 4.

Payback period = 3 years + (45000-38000) / (48000-38000) = 3.70 years

Thumbs up please if satisfied. Thanks :)