You are evaluating a project based on the following: Initial Investment: $750,00
ID: 2722772 • Letter: Y
Question
You are evaluating a project based on the following:
Initial Investment: $750,000
Cash Flows: $200,000 per year for 4 years (end of year)
Required Return: 8% Required Payback: 4 Years
1. Would you accept or reject the project based on the Net Present Value (NPV)?
2. Would you accept or reject the project based on the Payback Period?
3. Would you accept or reject the project based on the Discounted Payback Period?
4. Based on your answers to Questions 1-3, would you accept or reject the project? Why?
Explanation / Answer
1.
Year
CashFlow
PV Factor@ 8%
PV
0
(750,000)
1.0000
(750,000)
1
200,000
0.9259
185,185
2
200,000
0.8573
171,468
3
200,000
0.7938
158,766
4
200,000
0.7350
147,006
NPV
(87,575)
NPV=-$87,575
As NPV is negative reject
2.
Payback Period
Year
CashFlow
Cum Cash Flow
-
(750,000)
(750,000)
1
200,000
(550,000)
2
200,000
(350,000)
3
200,000
(150,000)
4
200,000
50,000
Payback period= 3+150,000/200,000
=3+0.75
=3.75 years
As it is recovering in 3.75 years that is within project life .Accept
3. Discounted payback period
Year
Cash Flow
PV Factor @ 8%
PV cash flow
Discounted cum Cash flow
0
(750,000)
1.0000
(750,000.00)
(750,000.00)
1
200,000
0.9259
185,185.19
(564,814.81)
2
200,000
0.8573
171,467.76
(393,347.05)
3
200,000
0.7938
158,766.45
(234,580.60)
4
200,000
0.7350
147,005.97
(87,574.63)
Could not recover even in 4 years.
Reject the project as it could not recover
4. Project is not acceptable as NPV is negative because NPV is relavant method to compute
Year
CashFlow
PV Factor@ 8%
PV
0
(750,000)
1.0000
(750,000)
1
200,000
0.9259
185,185
2
200,000
0.8573
171,468
3
200,000
0.7938
158,766
4
200,000
0.7350
147,006
NPV
(87,575)
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