Question

Use Table 1 below to determine the payback, ROI, and NPV for the hypothetical project. Where appropriate write the equations that are needed to calculate the values and then substitute the numbers that are needed for calculating actual values. You may determine the payback by reading the table and specifying the year when payback occurs (a whole number will suffice). A sufficient answer consists of either a single value or an equation with the appropriate numbers. Assume a 3 year time horizon and that the cost incurred at time 0 is the total investment needed to put the system into service Cumulativ e Cost Cumulativ Year Benefit e Benefit Cost Discount-5% 1.000 0.952 0.907 0.864 0 50,000 40,000 22,000 80,00025,000 65,0004500028,000 125,000 50,000 72,000 97,000 40,000 40,000 Total 145,000 135,000

Answer 1

1 Payback period Invesi 50000 We have recovered 40000 in first year only So payback period will be: 1 Year+ 10000/40000 12 (Months) 1 Year and 3 Months 2 ROI: The formula to calculate return on investment is: Average annual profit after tax/ Average investment *100 Average annual benefit: 145000/3 48333 Average investment 50000 (given) so ROI: 48333/50000*100-9636 3 NPV Year linflow |Outflow | Net Cash flow Discount-5% Net Present value 0 1 40000 22000 2 40000 25000 3 65000 28000 0 50000 50000 18000 15000 37000 0.952 0.907 0.864 50000 17136 13605 31968 12709 Net Present value