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You are considering a project that will require an initial outlay of $200,000. This project has...

You are considering a project that will require an initial outlay of $200,000. This project has an expected life of four years and will generate after-tax cash flows to the company as a whole of $60,000 at the end of each year over its five-year life. Thus, the free cash flows associated with this project look like this:

Year

Free Cash Flow

0

-150,000

1

60,000

2

60,000

3

60,000

4

60,000

Given a required rate of return of 10% percent, calculate the following:

a. Discounted payback period

b. Net present value

c. Profitability index

Please show the answer step by step and explain it a little bit more, thanks!!

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Answer #1

The discounted cash flows are calculated to find out the respective metrics

FCF 150000 Year Discount factor Discount factor PV of FCF Cum PV of FCF 1/1+10%)ng 1/(1+10%) 1/(1+10%)2 1/(1+10%)13 1/(1+10%) 1.000 0.909 0.826 0.751 0.683 0 150000 150000.00 54545.5 95454.55 49586.8 45867.77 45078.9 40980.8 40191.93 60000 60000 -788.88 4 a) Initial investment 150000 Discounted payback 3+(788.88/40980.8) 3.019 NPV 40191.927 positive PV of CF divided by Sum of 190191.927 Initial investment 150000 1.2679

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