Question 2) Shannon Industries is considering a project which has the following

Question

Question 2) Shannon Industries is considering a project which has the following cash flows: Year Cash Flow 0 $2,000 3,000 3,000 1,500 4 The project has a payback of 2.5 years. The firm's cost of capital is 12 percent. What is the project's net present value NPV? Question 3) You are considering the purchase of an investment that would pay you $5,000 per year for Years 1-5, S3,000 per year for Years 6-8, and $2,000 per year for Years 9 and 10. If you require a 14 percent rate of return, and the cash flows occur at the end of each year, then how much should you be willing to pay for this investment?

Explanation / Answer

Since Payback Period is 2.5 years, At Payback Period Cash Outflows = Cash Inflows

Cash Inflows for first 2.5 years = 2000 + 3000 + 3000*1/2 = 6500

Therefore, Cash Outflow in Year 0 = $ 6500

Since Payback Period is 2.5 years, At Payback Period Cash Outflows = Cash Inflows

Cash Inflows for first 2.5 years = 2000 + 3000 + 3000*1/2 = 6500

Therefore, Cash Outflow in Year 0 = $ 6500

Year Project Cash Flows (i) DF@ 12% (ii) PV of Project A ( (i) * (ii) ) 0 -6500 1 (6,500.00) 1 2000 0.893 1,785.71 2 3000 0.797 2,391.58 3 3000 0.712 2,135.34 4 1500 0.636 953.28 NPV 765.91

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