You are looking at a new project and have estimated the following cash flows, net income...
You are looking at a new project and have estimated the following cash flows, net income and book value data:
Year 0: CF = -165,000
Year 1: CF = 63,000
Year 2: CF = 70,000
Year 3: CF = 91,000
Your required return for assets of this risk is 12%. What is the NPV for this project?
Following the above problem, what is the payback period of this project? If the cutoff of your company’s payback period is 3 years, should you accept this project?
Homework Answers
a.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=63000/1.12+70,000/1.12^2+91000/1.12^3
=176825.57
NPV=Present value of inflows-Present value of outflows
=176825.57-165,000
=11825.57(Approx).
b.
| Year | Cash flows | Cumulative Cash flows |
| 0 | (165,000) | (165,000) |
| 1 | 63,000 | (102,000) |
| 2 | 70,000 | (32000) |
| 3 | 91,000 | 59000 |
=2+(32000/91000)
Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).
=2.35 years(Approx)
Hence since payback is less than 3 years;project must be accepted.
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