SHOW ALL WORK FOR FULL CREDIT 1. What is the payback period of the following pro

ID: 2627433 • Letter: S

Question

SHOW ALL WORK FOR FULL CREDIT

1. What is the payback period of the following project?

Initial Investment: $80,000

Projected life: 8 years

Net cash flows each year: $15,000

2. What is the discounted payback period of the following project, assuming your cost of capital is 7%?

Initial Investment: $80,000

Projected life: 8 years

Net cash flows each year: $15,000

3. Your firm is looking at a new investment opportunity, Project X, with net cash flows as follows:

---- Net Cash Flows ----

Project X

Initial Cost at T-0 (Now) ($10,000)

cash inflow at the end of year 1 5,000

cash inflow at the end of year 2 4,000

cash inflow at the end of year 3 3,000

Calculate project Alpha's Net Present Value (NPV), assuming your firm

Ans 5.b)

Cost of Capital 5%

NPV Project X = -10,000 + 5,000 / (1+0.05)^1 + 4,000 / (1+0.05)^2 + 3,000 / (1+0.05)^3

NPV Project X = 981.54

NPV Project Y = -20,000 + 3,000 / (1+0.05)^1 + 8,000 / (1+0.05)^2 + 13,000 / (1+0.05)^3

NPV Project Y = 1,343.27

Accept Project Y at 5% cost of capital as the NPV of project Y is more project X.

Cost of Capital 10%

NPV Project X = -10,000 + 5,000 / (1+0.10)^1 + 4,000 / (1+0.10)^2 + 3,000 / (1+0.10)^3

NPV Project X = 105.18

NPV Project Y = -20,000 + 3,000 / (1+0.10)^1 + 8,000 / (1+0.10)^2 + 13,000 / (1+0.10)^3

NPV Project Y = -894.07

Accept Project X at 10% cost of capital as NPV of project X >0.

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