Net Present Value (NPV) of the Project
The Net Present Value of the Project = Present Value of annual cash inflows – Initial Investments
Present Value of annual cash inflows
Year |
Net Cash Flow ($) |
Present Value factor at 7% |
Present Value of Cash Flow ($) |
1 |
3,75,000 |
0.93458 |
3,50,467 |
2 |
5,00,000 |
0.87344 |
4,36,719 |
3 |
4,25,000 |
0.81630 |
3,46,927 |
4 |
5,00,000 |
0.76290 |
3,81,448 |
TOTAL |
$ 15,15,561 |
||
Initial Investment
The payback period is the number of years taken to recover the initial investments of the project. Here the payback period of the project is 2.50 years given, therefore, we can determine the amount of initial investments of the project
Initial Investment of the Project = $375,000 + $500,000 + ($425,000 x 0.50)
= $375,000 + $500,000 + $212,500
= $10,87,500
Therefore, the Net Present Value of the Project = Present Value of annual cash inflows – Initial Investments
= $ 15,15,561 - $10,87,500
= $4,28,061
“The Net Present Value (NPV) of the Project = $4,28,061”
The following are the correct statements which indicates the disadvantage of using the regular payback period for capital budgeting decisions
-The payback period does not take the time value of money into the account
-The payback period does not take the project’s entire life into account
The Decision Process
The NPV shows how much value the company is creating for its shareholders
“NPV” is the single best method to use when making capital budgeting process
5. The NPV and payback period Aa Aa What information does the payback period provide? Suppose...
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7. The NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project's net present value (NPV). You don't know the project's initial cost, but you do know the project's regular, or conventional, payback period is 2.50 years. Year Cash Flow Year 1 $275,000 Year 2 $450,000 Year 3 $400,000 Year 4 $400,000 If...
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