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
=11826(Approx).
b.
| Year | Cash flows | Cumulative Cash flows |
| 0 | (165,000) | (165,000) |
| 1 | 63,000 | (102,000) |
| 2 | 70,000 | (32,000) |
| 3 | 91,000 | 59,000 |
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+(32000/91000)
=2.35 years(Approx)
Hence since payback is less than 3 years;project must be accepted.
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