J&E Enterprises is considering and investment which produces no cash flows for t

Question

J&E Enterprises is considering and investment which produces no cash flows for the first year. In the second year, the cash inflow is $47,000. This inflow will increase to $198,000 and then $226,000 for the following two years, respectively, before ceasing permanently. The initial investment will cost $318,000. The firm requires a 15.5 percent rate of return and has a required discounted payback period of three years. Should the project be accepted? Why or why not? show all work

Year Cash flow Discounted cash flow
@ 15.5% Cumulative cash flow 1 $0 $0.00 $0.00 2 $47,000 $35,321.72 $35,231.72 3 $198,000 $128,504.77 $163,736.49 4 $226,000 $126,993.21 $290,729.70

Explanation / Answer

Discount Factor (From PV Table @15.5%)

No, the project should not be accepted as it has a negative NPV(of $27270.3).

Also, the project has a required discounted payback period of 3 years which means that the money which is invested today should come back in 3 years (discounted means taking the time value of money into account, which means that the present worth of the inflows is considered). In this case even in 4 years(after which there is no cash flow) the investment cannot bring back the amount initially invested. Therefore, this project should not be taken up.

Year Cash flow

Discount Factor (From PV Table @15.5%)

Discounted cash flow
@ 15.5% Cumulative cash flow Cumulative cash flow (taking outflow in account) 0 ($318000) 1 ($318000) ($318000) 1 $0 0.8658 $0.00 $0.00 ($318000) 2 $47,000 0.7496 $35,231.72 $35,231.72 ($282768.28) 3 $198,000 0.6490 $128,504.77 $163,736.49 ($154263.51) 4 $226,000 0.5619 $126,993.21 $290,729.70 ($27270.3)

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