I have found the way to determine payback but am having trouble understand part
ID: 2705724 • Letter: I
Question
I have found the way to determine payback but am having trouble understand part 2 of the question. I am trying to solve using excel.
1) An investment project requires a net investment of $100,000. The project is expected to generate annual net cash flows of $28,000 for the next 5 years. The firm's cost of capital is 12%.
Net investment
1
2
3
4
5
100,000
$28,000
$28,000
$28,000
$28,000
$28,000
72,000
$44,000
$16,000
Payback
3.428571
3.43
Part 2
Net investment
1
2
3
4
5
100,000
$28,000
$28,000
$28,000
$28,000
$28,000
72,000
$44,000
$16,000
Payback
3.428571
3.43
Explanation / Answer
payback period= 3.571years
PV= 28000PVIFA(12%,5)= 100933.733
Yes, since the PV of the project is greater than 100000( net investment) it must be accepted.
the investment is recovered in 3-4 year