1.For questions 1-4, consider a project with $150,000 initial cost (year 0), cas

Question

1.For questions 1-4, consider a project with $150,000 initial cost (year 0), cash inflows of $45,200 per year for 5 years (end of each year), and a discount rate of 10%. What is the (straight) payback period?

3.3 years

2.Given your answer in the last question and that you want to use the payback rule with a cutoff period of 3 years, would you accept the project?

Reject

3.What is the discounted payback period if the opportunity cost of capital (OCC) is 10%?

4.2 years

4.What’s the profitability index of the project in the previous question, if the opportunity cost of capital is 10%?

3 years

Explanation / Answer

Straight Payback Period = 3+0.31 i.e 3.31 years

No project should not be accepted

Discounted payback period = 4.17 years

Profitability Index = 0.14

Particulars Year Cash Flows Cum Cash flows PVF @ 10% PV Cum PV Initial Cost 0 -150000 -150000 1 -150000 -150000 Cash Inflows 1 45200 -104800                      0.91    41,090.91 (108,909.09) Cash Inflows 2 45200 -59600                      0.83    37,355.37     (71,553.72) Cash Inflows 3 45200 -14400                      0.75    33,959.43     (37,594.29) Cash Inflows 4 45200 30800                      0.68    30,872.21        (6,722.08) Cash Inflows 5 45200 76000                      0.62    28,065.64        21,343.56 Net Present Value    21,343.56

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