Swerling Company is considering a project with the following cash flows. What is

Question

Swerling Company is considering a project with the following cash flows. What is the payback period of the proposed Swerling Company project? What is the net present value of the proposed Swerling Company project if the discount rate is 6%? What is the profitability index of the proposed Swerling Company project if the discount rate is 6%? What is the IRR of the proposed Swerling Company project? What is the discounted payback period of the proposed Swerling Company project if the discount rate is 6%?

Year Cash Flow 0 ($20,000) 1 $3,000 2 $4,000 3 $5,000 4 $6,000 5 $7,000

Explanation / Answer

1. Payback period:

Payback period is time taken to recover initial investment, without taking into account time value of money.

Initial investment = 20000;

In 4 years project recovers 18000, rest 2000 is covered in next year.

Pay back period = 4+ 2000/7000 = 4.28 years.

2. NPV

3. Profitability Index = Present value of future cash flow/ initial investment
571.64 / 20000 = .028582 or 2.85%
4.IRR : Given cash flows we solve for IRR (in financial calculator or excel)
IRR = 6.91%

5. Discounted Payback Period

At the end of 4 year, 4659.17 is left to recover.
Discounted payback time period = 4+ 4659.17/5230.8 = 4.89 years.

This is similar to payback period escept that we use discounted cash flow instead of actual cash flow.

Year 0 1 2 3 4 5 Cash Flow -20000 3000 4000 5000 6000 7000 Cumulative cash flow -17000 -13000 -8000 -2000 5000

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