Question

Assume that you are a financial analyst for Tangshan Mining Company and are given the following

information about the firm’s new project: the project’s initial after-tax cost at t = 0 is $8,000,000 and

the project is expected to provide after-tax operating cash inflows as follows:

Year	Cash Inflow:
One	$2,800,000
Two	$2,900,000
Three	$3,200,000
Four	$1,800,000

a. Calculate the payback period for this project.

1. If the maximum acceptable payback period is 3 years, should this project be accepted? Why or

why not?

b. Assume that the firm’s “Weighted Average Cost of Capital” (WACC) is 6%. Calculate the

“Net Present Value” (NPV) for the above project.

1. Based on your NPV calculations above, should this project be accepted? Why or why not?

Answer 1

a

Project
Year	Cash flow stream	Cumulative cash flow
0	-8000000	-8000000
1	2800000	-5200000
2	2900000	-2300000
3	3200000	900000
4	1800000	2700000

Payback period is the time by which undiscounted cashflow cover the intial investment outlay

this is happening between year 2 and 3

therefore by interpolation payback period = 2 + (0-(-2300000))/(900000-(-2300000))

2.72 Years

1

Accept project as payback period is less than 3 years

b

Discount rate	6.000%
Year	0	1	2	3	4
Cash flow stream	-8000000	2800000	2900000	3200000	1800000
Discounting factor	1.000	1.060	1.124	1.191	1.262
Discounted cash flows project	-8000000.000	2641509.434	2580989.676	2686781.706	1425768.594
NPV = Sum of discounted cash flows
NPV Project =	1335049.41
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

1

Accept project as NPV is positive