Question

(Ignore income taxes in this problem.) Farah Corporation has provided the following data concerning a proposed investment project: $ 760,000 8 years $ 30,000 $ 152,000 $ 108,000 Initial investment Life of the project Working capital required Annual net cash inflows Salvage value The company uses a discount rate of 11%. The working capital would be released at the end of the project. Required: Compute the net present value of the project. (Round "PV Factor" to 3 decimal places. Round your other intermediate calculations and final answers to the nearest whole dollar.)(Use Exhibit 11B-1, Exhibit 11B-2) Net present value %24

Answer 1

Net present value = present value of cash inflows - present value of cash outflows

= -760,000-30,000+152000*PVAF(11%, 8 years) +108000*PVFA(11%, 8 years) + 30000*PVF(11%, 8 years)

=-790,000 +152000*5.146 + 138000*0.434

=52,084

NPV =-360,000 + 76000*PVAF(11%, 6 Years) +50,000*PVF(11%, 6 years)

=-360,000 +76000* 4.231+50,000*0.535

=-$11,694

Payback period is the time period in which the initial investment is recovered

= initial investment/annual cash flow

Annual cash flow is equal to operating income + depreciation expense since it is a non cash expense

Hence, payback period = 1300,000/(213000+100,000)

= 4.1533 years

I.e. 4.15 years