Part 1: An investment project requires a net investment of $100,000. The project

Question

Part 1:

An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $25,000 for the next 5 years. The firm's cost of capital is 12 percent. Determine the payback period for the project.

Select one: a. 0.28 years b. 1.4 years c. 3.57 years d. 4.00 years

Part 2:

An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $40,000 for the next 5 years. The firm's cost of capital is 10 percent. Determine the discounted payback period for the project.

Select one: a. 2.12 years b. 2.50 years c. 3.02 years d. 4.00 years

Explanation / Answer

Part 1.

Payback period = Cost of project / annual cash flow

= 100000/25000

= 4 years

Part 2.

Discounted Payback period = 3+(525.92/24836.85)= 3.02117 years

Year Cash Flow (A) Net Cash flow (B) Present Value (C)= 1/(1+i)n Discounted cash flow (D) = A*C Net discounted cash flow (E) 0 -100000 -100000 1 -100000 -100000 1 40000 -60000 0.90909 36363.64 -63636.36 2 40000 -20000 0.82645 33057.85 -30578.51 3 40000 20000 0.75131 30052.59 -525.92 4 40000 60000 0.68301 27320.54 26794.62 5 40000 100000 0.62092 24836.85 51631.47

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