Question

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively.

Time:	0	1	2	3	4	5	6
Cash flow:	–$7,400	$1,170	$2,370	$1,570	$1,570	$1,370	$1,170

NPV=____? (round your final answer to 2 decimal places.)

Answer 1

Year (n)	Cash flow from project (CF)	Cumulative cash flow	PV = CF/(1+7%)^n	Cumulative Discounted cash flow	Formula used for PV calculation
0	-$7,400	-$7,400	-$7,400.00	-$7,400.00	CF/(1+7%)^0
1	$1,170	-$6,230	$1,093.46	-$6,306.54	CF/(1+7%)^1
2	$2,370	-$3,860	$2,070.05	-$4,236.49	CF/(1+7%)^2
3	$1,570	-$2,290	$1,281.59	-$2,954.90	CF/(1+7%)^3
4	$1,570	-$720	$1,197.75	-$1,757.16	CF/(1+7%)^4
5	$1,370	$650	$976.79	-$780.37	CF/(1+7%)^5
6	$1,170	$1,820	$779.62	-$0.75	CF/(1+7%)^6
NPV (Sum of PVs)			-$0.75
Payback Period for project =	4.53	(In Years)
Payback Period (period where cumulative cash flow is zero) = X + (Y/Z)
Where,
X = Last period with a negative cumulative cash flow;
Y = Absolute value of cumulative cash flow at the end of the period X;
Z = cash flow during the period after X.

Discounted payback period is more than 6 years as cumulative discounted cash flow is negative at the end of year 6

Net present value (NPV) of the project is - $0.75

The project is not acceptable because payback and discounted payback statistics for the project are more than 2.0 and 3.0 years and NPV is negative