Homework Answers
Solution:
payback period is the time required to recover the initial investment.
Initial investment is 105,000 + 15,000 for inventory = 120,000
Part A ) Payback period: from cumulative CF we can see that in two years we have 110,000 and rest 10,000 will be recovered from 3rd year when CF is 55,000.
Hence pay back = 2 + 10,000/55000 = 2.18
Part B ) From discounted Cumulative CF we can see that the amount that has been recovered in 2 years is 95,454.55
Third year discounted CF is 41,322.31 and we have to recover (120,000- 95,454.55) from this year
Hence discounted Payback period = 2+ ( 120,000- 95,454.55)/41322.31 = 2.59 years
Part c ) NPV is the sum of discounted cash flow and it is 97807
Part D ) Since NPV is positive and payback period is less than the project period. We should do this project.
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