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Vilka [71]
3 years ago
7

Your firm has the opportunity to invest $90,000 in a new project opportunity but due to cash flow concerns, your boss wants to k

now when you can pay back the original investment. Using the discounted payback method, you determine that the project should generate inflows of $30,000, $35,000, $30,000, $25,000, and $20,000 respectively for an expected five years after completion of the project. Your firm's required rate of return (ror) is 10%. Calculate how long it should take to pay back the initial project investment. [Hint: List your all cash flow by year, investment can be seen as happening in year zero, calculate the NPV of inflow using Discount factor = 1/(1 + ror)^t, find the nearest break-even year using accumulated cash flow, then find the decimal point assuming cash flow are evenly distributed within a year]

Business
2 answers:
aev [14]3 years ago
8 0

Answer: 3.67 years

Explanation:

Cashflow by year

Year 0 $90,000(Investment)

Year 1 $30,000

Year 2 $35,000

Year 3 $30,000

Year 4 $25,000

Year 5 $20,000

Rate of return(ror) = 10%= 0.1

Calculating Net present value(NPV) using discount factor ;

Discount factor = 1/(1 + ror)^t

YEAR 1

Discount factor:

1/(1 + 0.1) = 1/1.1 =0.9

NPV = 0.9 × $30,000 = $27,000

YEAR 2

Discount factor:

1/(1 + 0.1)^2 = 1/1.1^2 =0.83

NPV = 0.826 × $35,000 = $29,050

YEAR 3

Discount factor:

1/(1 + 0.1)^3 = 1/1.1^3 =0.75

NPV = 0.75 × $30,000 = $22,500

YEAR 4

Discount factor:

1/(1 + 0.1)^4 = 1/1.1^4 =0.68

NPV = 0.68 × $25,000 = $17,000

YEAR 5

Discount factor:

1/(1 + 0.1)^5 = 1/1.1^5 =0.62

NPV = 0.62 × $20,000 = $12,400

Year 1: $90,000 - $27,000 = $63,000

Year 2: $63,000 - $29,050 = $33,950

Year 3: $33,950 - $22,500 = $11,450

Year 4: $17,000

Year 5: $12,400

3 years + ($11,450/$17000)

3 years + 0.67years

3.67 years.

Rus_ich [418]3 years ago
4 0

Answer:

Complete solution in tabular form  is given below:

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