Question

Sun Peaks Ski Resort is considering an investment of $ 250,000 in a capital project. The project will generate the following net cash inflows over the next 4 years.

Year

1 year 100,000

2 year 90,000

3 year 60,000

4 year 50,000

The company’s cost of capital is 10%, compounded annually. Calculate the following: a) The payback period

b) The discounted payback period

c) The net present value

d) Would you recommend they go ahead with the project? Why?

Answer 1

a)
Payback period
Time	Amount	Cumulative
-	(250,000.00)	(250,000.00)
1.00	100,000.00	(150,000.00)
2.00	90,000.00	(60,000.00)
3.00	60,000.00	-
4.00	50,000.00	50,000.00
PBP= 3 Years
b)
Discounted PBP
Time	Amount	PVf at 10%	PV	Cumulative
-	(250,000.00)	1.0000	(250,000.00)	(250,000.00)
1.00	100,000.00	0.9091	90,909.09	(159,090.91)
2.00	90,000.00	0.8264	74,380.17	(84,710.74)
3.00	60,000.00	0.7513	45,078.89	(39,631.86)
4.00	50,000.00	0.6830	34,150.67	(5,481.18)
Discounted PBP not available since investment is not able to recover its cost
c)
Statement showing Cash flows
Particulars	Time	PVf 10%	Amount	PV
Cash Outflows	-	1.00	(250,000.00)	(250,000.00)
PV of Cash outflows = PVCO				(250,000.00)
Cash inflows	1.00	0.9091	100,000.00	90,909.09
Cash inflows	2.00	0.8264	90,000.00	74,380.17
Cash inflows	3.00	0.7513	60,000.00	45,078.89
Cash inflows	4.00	0.6830	50,000.00	34,150.67
PV of Cash Inflows =PVCI				244,518.82
NPV= PVCI - PVCO				(5,481.18)
Since NPV is negative company should not proceed with the investment