Please use the formula not the excel sheet.
Solution:
a. Calculation of undiscounted payback period
Year | Cash Flow | Cumulative Cash Flow |
1 | $0 | $0 |
2 | $6,000 | $6,000 |
3 | $6,500 | $12,500 |
4 | $7,000 | $19,500 |
5 | $7,500 | $27,000 |
6 | $8,000 | $35,000 |
7 | $8,500 | $43,500 |
8 | $9,000 + $10,000 (Salvage Value) | $62,500 |
Initial cost = $30,000
Undiscounted payback period = 5 year + (Initial cost - Cash inflow recovered from 5 years)/ Cash flow of 6^{th} year
= 5 year + ($30,000 - $27,000)/ $8,000
= 5 year + $3,000/$8,000
= 5 year + 0.375 year = 5.375 years
b. Calculation of net present value
Year | Cash Flow | Present Value Factor @ 6% | Present Value |
0 | ($30,000) Initial Cost | 1 | ($30,000) |
1 | $0 | 0.9434 | $0 |
2 | $6,000 | 0.8900 | $5,340 |
3 | $6,500 | 0.8396 | $5,457.40 |
4 | $7,000 | 0.7921 | $5,544.70 |
5 | $7,500 | 0.7473 | $5604.75 |
6 | $8,000 | 0.7050 | $5,640 |
7 | $8,500 | 0.6651 | $5,653.35 |
8 | $9,000 + $10,000 (Salvage Value) | 0.6274 | $11,920.60 |
Net Present Value | $15,160.80 |
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