Question

You are evaluating a project that will cost $504,000, but is expected to produce cash flows of $123,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 10.9% and your company's preferred payback period is three years or less. a. What is the payback period of this project? b. Should you take the project if you want to increase the value of the company? a. What is the payback period of this project? The payback period is years. (Round to two decimal places.) b. Should you take the project if you want to increase the value of the company? (Select from the drop-down menus.) If you want to increase the value of the company you take the project since the NPV is 7.

Answer 1

Solution: a) payback period=Initial investment/annul cash inflow 504000/123000 4.10 years b) annual cash inflow X PVIFA(10.9%,10)** PV of cash in flow Less : Initial investment NPV 123000.00 5.91401 727423.03 -504000.00 223423.03 **factor working : PVIFA(R%,n) PVIFA(10.9%,10) (1-(1+r)^-n)/r (1-(1.1094-10/0.109 5.91401 if you want to increase the value of the company you should take the project since the NPV is positive.