Homework Answers
Initial investment= $300,000 + $475,000 + $450,000/2
= $300,000 + $475,000 + $225,000
= $1,000,000
Net present value is solved here using a financial calculator. The steps to solve on the financial calculator:
- Press the CF button.
- CF0= -$1,000,000. It is entered with a negative sign since it is a cash outflow.
- Cash flow for all the years should be entered.
- Press Enter and down arrow after inputting each cash flow.
- After entering the last cash flow, press the NPV button and enter the weighted average cost of capital of 7%
- Press the down arrow and CPT buttons to get the net present value.
The net present value is $424,966.4980 $424,966.
Hence, the answer is option b.
A disadvantage of using discounted payback period in capital budgeting decisions is that the discounted payback period does not take the project’s entire life into account.
Hence, the answer is option a.
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