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4 years ago

Cash Payback Period, Net Present Value Method, and Analysis

Business

1 answer:

Digiron [165]4 years ago

8 0

Answer:

Plant Expansion

Cash payback period = 2 years

NPV = $304,707.24

Retail Store Expansion

Cash payback period = 2 years

NPV = $309,744.42

Explanation:

Cash payback period measures how long it takes for the amount invested in a project to be recovered from the cumulative cash flows.

Cash payback for the Plant Expansion

Amount invested = $-900,000

Amount recovered in the first year = $-900,000 + $450,000 = $-450,000

Amount recovered in the second year = $-450,000 + $450,000 = 0

The amount invested in the project is recovered In the second year. So, the cash payback period is 2 years.

Cash payback for the Retail Store Expansion

Amount invested = $-900,000

Amount recovered in the first year = $-900,000 + $500,000 = $-400,000

Amount recovered in the second year = $-400,000 + $400,000 = 0

The amount invested in the project is recovered In the second year. So, the cash payback period is 2 years.

The 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:

Plant Expansion

Cash flow in year 0 = $-900,000

Cash flow in year 1 = $450,000

Cash flow in year 2 = $450,000

Cash flow in year 3 = $340,000

Cash flow in year 4 = $280,000

Cash flow in year 5 = $180,000

I = 15%

NPV = $304,707.24

Retail Store Expansion

Cash flow in year 0 = $-900,000

Cash flow in year 1 = $500,000

Cash flow in year 2 = $400,000

Cash flow in year 3 = $350,000

Cash flow in year 4 = $250,000

Cash flow in year 5 = $200,000

I = 15%

NPV = $309,744.42

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

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