Charlie Company is attempting to evaluate the feasibility of investing $95,000 i
ID: 2699317 • Letter: C
Question
Charlie Company is attempting to evaluate the feasibility of investing $95,000 in a piece of equipment that has a 5-year life. The firm has estimated the cash inflows associated with the proposal as shown below. Assume the firm has a 12% cost of capital.
Year Cash inflows
1 $20,000
2 25,000
3 30,000
4 35,000
5 40,000
a. Calculate the payback period for the proposed investment.
b. Calculate the NPV for the proposed investment.
Explanation / Answer
Aa)Payback period = 3 + 15/25 = 3.6 years = Answer
Ab) NPV = -95,000 + 20,000/(1+12%)^1 + 25,000/(1+12%)^2 + 30,000/(1+12%)^3 + 35,000/(1+12%)^4 + 40,000/(1+12%)^5 = $9,080.60 = Answer
I am 100% sure of this :)