Question

Siemens AG invests €80,000,000 to build a manufacturing plant to build wind turbines. The company predicts net cash flows of €16,000,000 per year for the next 8 years. Assume the company requires an 8% rate of return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Round your present value factor to 4 decimals.) (1) What is the payback period of this investment? (2) What is the net present value of this investment?

Answer 1

Answer:

a) the payback period of this investment = 5.00 years

b) Net Present Value is €11,945,600    

Explanation:

From the given information:

a)

The payback period of this investment is determined by using the formula:

Payback Period = Cost of investment/ annual net cashflow

Payback Period = €80,000,000/€16,000,000

Payback Period = 5.00 years

Thus; the payback period of this investment = 5.00 years

b)  What is the net present value of this investment?

The net present value of the investment is computed in the table below        

                    interest rate of return i = 8%

                    no of year n = 8 years

The PV factor is for 8 years and 8% is:

Year         8% factor rate

1               0.9259

2               0.8573

3               0.7938

4               0.7350

5               0.6806

6               0.6302

7               0.5835

8               0.5403

                 5.7466

Cash Flow    Select Chart       Amount    ×   PV Factor =   PresentValue

Annual          Table B1            16,000,000 ×   5.7466    = 91,945,600

CashFlow      (Using Excel)                          

Net Cash

Inflow                                                                                  91,945,600

Less:

Investment                                                                          80,000,000      

Net Present                                                                           11,945,600            

Value