Charlie Company is attempting to evaluate the feasibility of investing $95,000 i
ID: 2699318 • 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
a)
payback period =
amount paid till year 3 = 75,000
amount left is 95000 - 75000 = 20,000
Hence payback period is 3 + 20000/35000 = 3.57 years
b)
NPV is -95000 + 20000/1.12 + 25000/1.12^2 + 30000/1.12^3 + 35000/1.12^4 + 40000/1.12^5 = $9,080.60