Question

Here are the net cash flows for a project your company is considering: Year 0 =...

Here are the net cash flows for a project your company is considering:

Year 0 = -1000

Year 1 = 250

Year 2 = 449

Year 3 = 800

Year 4 = 500

Year 5 = 500

If the payback period with interest is 3 years, for what range of interest rates is this project worth doing (start your analysis with an interest rate of 0%)?

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Answer #1

With Interest rate 0%

We will recover our initial cost in 2-3 years because250+449+800>1000

We will increase rates with the momentum of 4%

From Below analysis we can say that for interest rate above 19% we will have higher payback period

and upto 19% we will have less than or equal to 3 years payback period

Rates
Time CashFlow 4.00% 8% 12% 16% 19%
0 -1000 -1000 -1000 -1000 -1000 -1000
1 250 240.3846154 231.4814815 223.2142857 215.5172414 210.0840336
2 449 415.1257396 384.9451303 357.940051 333.6801427 317.0680037
3 800 711.1970869 635.0657928 569.4241983 512.5261388 474.7326513
4 500 427.4020955 367.5149264 317.7590392 276.1455489 249.3343757
5 500 410.9635534 340.2915985 283.7134279 238.0565077 209.5246855
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