At the bweginning of year 1, Northern Sun is considering a new line of frozen en

Question

At the bweginning of year 1, Northern Sun is considering a new line of frozen entrees. The accompanying table shows projected cash outflows and inflows. Assume all inflows and outflows are end-of-period payments
Initial
Investment
                           Yr 1         Yr 2      Yr 3      Yr 4      Yr 5
R&D                   $(200)
Pkg                       (55) 

Testing                 (100)                                         $(50)
Mktg                                 $(15)     $(10)    $(10)     $(10)
Distribution                        (30)        (50)     (50)       (50)
Cash Inflow                         100         250      300        300
                        _______  _____    _____   _____     _____

Net Cash Flows    $(355)    $ 55       $190    $240       $190

The company's cost of capital is 10 %. Compute the following:
a. Net present value
b. Payback

PLEASE SHOW ALL WORK.

Explanation / Answer

NPV is NPV(10%,55,190,240,190)-355 = $162.11 Payback period : Payback period is the time required for cumulative cash inflows to recover the cash outflows of the project. Payback period (PBP) = Year before full recovery + (Unrecovered cost at start of year/Cash flow during year) We have Initial Investmemt + other cost as 355 & annual CF as 55,190,240,190 So payback period is 2 yr+(355-(55+190))/240 = 2.46 years

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