In: Finance

Stern Associates is considering a project that has the following
cash flow data. What is the project's payback? Show Work!

Year |
0 |
1 |
2 |
3 |
4 |
5 |

Cash flows |
-$1,000 |
$400 |
$410 |
$420 |
$430 |
$440 |

**Answer: 2 years and 166 days ( 2.45 years)**

**Payback period**

When the annual cash flows are not uniform, the cumulative cash inflows from operations must be calculated for each year. The payback period shall be corresponding period when total of cumulative cash inflows is equal to the initial capital investment. However, if exact sum does not match then the period in which it lies should be identified. After that we need to compute the fraction of the year.

Initial capital investment = $1,000

Cash flows

Year |
Cash flow |
Cumulative cash flow |

1 |
$400 |
$400 |

2 |
$410 |
$810 |

3 |
$420 |
$1,230 |

4 |
$430 |
$1,660 |

5 |
$440 |
$2,100 |

Payback period in this case will lie between year 2 and year 3.
Since up to 2 years a sum of $810 shall be recovered, balance of
$190 shall be recovered in the part (Fraction) of 3^{rd}
year, Computation is as follows

= (Balance recoverable ÷ Cash flow of year 3) * 365 days

= ($190 ÷ $420) * 365 days

= 165.119 days

_{ }
= 166 days

(or in yeas = ($190 ÷ $420) = .45 years)

**Payback period =** **2 years and 166
days**

**Note:**

$810 will be received in 2 years and cash flow of balance $190 will be received in 166 days(.45 year) . So Total payback period will be 2 years and 166 days (2.45 years)

19. Stern Associates is considering a project that has the
following cash flow data. What is the project's payback?
Year
0
1
2
3
4
5
Cash flows
-$975
$300
$310
$320
$330
$340
a.
2.54 years
b.
2.42 years
c.
3.83 years
d.
3.14 years
e.
3.61 years

You are considering a project that has the following cash flow
and WACC data. What is the project’s NPV?
WACC:
9.00%
Year:
0
1
2
3
4
5
Cash flows:
–$1,000
$300
$300
$300
$300
$300
Select one:
a. 150.62
b. 176.4
c. 166.90
d. 143.90

Redesign Inc. is considering a project that has the following
cash flow data. (a) What is the project's payback period? (b) What
is the project's discounted payback period? Assume the cost of
capital is 12%. Year 0 1 2 3 Cash flows -$500 $200 $200 $200

Simms Corp. is considering a project that has the following cash
flow data. What is the project's IRR? Note that a project's
projected IRR can be less than the WACC or negative, in both cases
it will be rejected.
Year
0
1
2
3
Cash flows
-$1,025
$425
$425
$425

Susmel Inc. is considering a project that has the following cash
flow data. What is the project's payback?
No original investment given
Year 0 1 2 3
Cash flows -$500 $150 $200 $300
Group of answer choices 1.90 years 2.63 years 2.50 years 1.93
years

Samsung. is considering a project that has the following cash
flow data. What is the project's IRR? Note that a project's
projected IRR can be less than the WACC or negative, in both cases
it will be rejected.
Year
0
1
2
3
Cash flows
-$1,025
$425
$425
$425

Siblene Penn is considering a project that has the following
cash flow data. What is the discounted payback using a 11.2% cost
of capital?
Year 0 1 2 3 4 5
Cash flows -$6,750 $2,000 $2,025 $2,050 $2,075 $2,100

Warr Company is considering a project that has the following
cash flow data. What is the project's IRR? Note that a project's
projected IRR can be less than the WACC or negative, in both cases
it will be rejected.
Year
0
1
2
3
4
Cash flows
-$1565
$400
$400
$400
$400
a. 0.85%
b. 0.76%
c. 0.89%
d. 0.91%
e. 0.78%

Warr Company is considering a project that has the following
cash flow data. What is the project's IRR? Year 0 1 2 3 4 Cash
flows -$1,415 $400 $400 $400 $400

Nichols Inc. is considering a project that has the following
cash flow data. What is the project's IRR? Note that a project's
IRR can be less than the cost of capital or negative, in both cases
it will be rejected.
Year
0
1
2
3
4
5
Cash flows
−$1,250
$325
$325
$325
$325
$325
a. 11.47%
b. 10.40%
c. 9.43%
d. 10.92%
e. 9.91%
Westwood Painting Co. is considering a project that has the
following cash flow and cost...

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