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10 RS - IXIU marks Ll: You are considering an investment in a pro of $105,000, and annual after-tax cash flows of $55,000. Th

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Solution:

payback period is the time required to recover the initial investment.

Initial investment is 105,000 + 15,000 for inventory = 120,000

Cumm Discounted CF Formula Cumm CF Discounted CF Year CF O-120000 -120000 -105000-15000 50000.00-55000/(1+0.1)^1 45454.55 -55

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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