Shane Company is considering an investment in a new product line. Shane Company desires to earn at least an 8% return f...
- Shane Company is considering an investment in a new product line. Shane Company desires to earn at least an 8% return from the investment costs $110,000. The investment has the following net cash flows:
Year 1 50,000
Year 2 35,000
Year 3 25,000
Year 4 10,000
What is the cash payback period of the investment?
What is the net present value of the investment?
Based on the net present value of the investment, is it an acceptable project? Give a short reason explaining why?
Homework Answers
| Year | Cash Inflow | Cumulative cash flow |
| 1 | 50000 | 50000 |
| 2 | 35000 | 85000 |
| 3 | 25000 | 110000 |
| 4 | 10000 | 120000 |
Cash payback period of the investment = 3 years
Net present value of the investment = Present value of cash inflow @8% - Initial investment
= 50000*0.92593+35000*0.85734+25000*0.79383+10000*0.73503 - 110000
= $6500
It is an acceptable project because NPV is positive.
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