You are evaluating a project that will cost $549,000, but is expected to produce

Question

You are evaluating a project that will cost $549,000, but is expected to produce cash flows of $123,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 10.7% and your company's preferred payback period is three years or less. a. What is the payback period of this project? The payback period is years (Round to two decimal places.) b. Should you take the project if you want to increase the value of the company? (Select from the drop-down menus) if you want to increase the value of the company you | ?I take the project since the NPV is

Explanation / Answer

a. Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 4 + ( 57,000 /123,000)

= 4.46 Years

Hence the correct answer is 4.46 Years

Note :

b.

NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= [ $ 123,000 * 1/(1.107) ^ 1 +$ 123,000 * 1/(1.107) ^2 +$ 123,000 * 1/(1.107) ^3+.....+$ 123,000 * 1/(1.107) ^10]- $ 549,000

= $ 184,578.88

Hence the correct answer is :

If you want to increase the value of the company you Must take the project since the NPV is Positive.

Year Investment Cash Inflow Net Cash Flow 0 -5,49,000 -    -5,49,000 (Investment + Cash Inflow) 1 -    1,23,000 -4,26,000 (Net Cash Flow + Cash Inflow) 2 -    1,23,000 -3,03,000 (Net Cash Flow + Cash Inflow) 3 -    1,23,000 -1,80,000 (Net Cash Flow + Cash Inflow) 4 -    1,23,000 -57,000 (Net Cash Flow + Cash Inflow) 5 -    1,23,000 66,000 (Net Cash Flow + Cash Inflow) 6 -    1,23,000 1,89,000 (Net Cash Flow + Cash Inflow) 7 -    1,23,000 3,12,000 (Net Cash Flow + Cash Inflow) 8 -    1,23,000 4,35,000 (Net Cash Flow + Cash Inflow) 9 -    1,23,000 5,58,000 (Net Cash Flow + Cash Inflow) 10 -    1,23,000 6,81,000 (Net Cash Flow + Cash Inflow)

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