Suppose you are evaluating a project with the cash inflows shown in the followin

Question

Suppose you are evaluating a project with the cash inflows shown in the following table. Your boss has asked you to calculate the project's NPV. You don't know the project's initial cost, but you do know the project's regular payback period is 2.5 years. If the project's WACC is 7%, the project's NPV is which of the following? $363,652 $484,870 $404,058 $383,585 Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. The payback period does not take the time value of money into account. The payback period does not take the project's entire life into account. The payback period is calculated using net income instead of cash flows.

Explanation / Answer

Answer 1 The project pay back period is 2.5 years.It means that project initial cost will recovered in 2.5 years. Hence Project initial cost = Cash inflow for year 1 + Cash inflow for year 2 + (Cash inflow for year 3 / 2) Project Initial cost = 375000 + 425000+(500000/2) = $1050000 Calculation of Project NPV Year Cash flow PV factor @ 7% WACC Present Value 0 -1050000 1                        -10,50,000 1 375000 0.934579439                            3,50,467 2 425000 0.873438728                            3,71,211 3 500000 0.816297877                            4,08,149 4 425000 0.762895212                            3,24,230 Net present value                            4,04,058 The answer is $404058 Answer 2 The disadvantages of using regular payback period is, The payback period does not take the time value of money into account.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.