Question

A project that costs $2,000 to install will provide annual cash flows of $510 for the next 5 years. The firm accepts projects with payback periods of less than 4 years.
Required:
a. What is this project's payback period?
b. What is project NPV if the discount rate is 3%?
c. What is project NPV if the discount rate is 10%?

Answer 1

Answer:

3.92

NPV when I is 3% = $335.65

NPV when I is 10% = $-66.70

Explanation:

Pay back period is the amount of time it takes to recover the amount invested in a project to be recovered from the cumulative cash flows.

Payback period = amount invested / cash flow = $2000 / $510 = 3.92

Net present value is the present value of after tax cash flows from an investment less the amount invested.

NPV can be calculated using a financial calculator

Cash flow in year 0 = $-2000

Cash flow each year from year 1 to 5 = $510

NPV when I is 3% = $335.65

NPV when I is 10% = $-66.70

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you