Question

24. If a project has: year 0 -500 year 1- $200 year 2 for this project is: a) 2 years b) 2.5 years c)3 years d) 3.5 years $200 and year 3- $200, then the payback period 25. A project has an initial cost of -10,000. Cash flows of 3,000 will be generated for the next 7 years. If required return is 10%; what is the NPV of this project a) $4,605 b) $8,605 c) $10,605 d) $14,605

Answer 1

24. Payback period has been calculated as follows:

Year	Opening Balance	Outflow	Inflow	Closing balance
0	0	500	0	-500
1	-500		200	-300
2	-300		200	-100
3	-100		200	100

• Opening balance = previous year's closing balance
• closing balance = opening balance-outflow+inflow
• We see that at the end of year 2, 100 remained from the initial investment and the inflow in year 3 was 200 which is assumed to be earned uniformly over the year, we we can say that the 100 was earned by half of the year 3 so 2 full years and half of year 3 is the payback period.
• Payback period = 2.5 years

25. NPV is calculated below:

Year	CF	Discount factor		Discounted CF
0	-10000	1/1.10^0=	1	-10000*1=	-10000
1	3000	1/1.10^1=	0.909090909	3000*0.909090909090909=	2727.272727
2	3000	1/1.10^2=	0.826446281	3000*0.826446280991735=	2479.338843
3	3000	1/1.10^3=	0.751314801	3000*0.751314800901578=	2253.944403
4	3000	1/1.10^4=	0.683013455	3000*0.683013455365071=	2049.040366
5	3000	1/1.10^5=	0.620921323	3000*0.620921323059155=	1862.763969
6	3000	1/1.10^6=	0.56447393	3000*0.564473930053777=	1693.42179
7	3000	1/1.10^7=	0.513158118	3000*0.513158118230706=	1539.474355
				NPV=Sum of all discounted CF	4605.256453

So NPV = $4605.26