Question

F.E

3. A firm is considering a project that has the following cash flow data. What is the project's payback ?  Answer in years to the nearest hundredth as in xx.xx.

Year	0	1	2	3	4	5
Cash flows	-$975	$300	$310	$320	$68	$97

4. If you deposit $25,000 in a saving account paying 2.5% per year, how much will you have after 5 years if the bank promises annual compounding? Round your answer to the nearest cent (xxxxx.xx) and enter without the dollar sign.

Answer 1

3.

Year	Cash flows	Cumulative Cash flows
0	(975)	(975)
1	300	(675)
2	310	(365)
3	320	(45)
4	68	23
5	97	120

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=3+(45/68)

=3.66 years(Approx)

4.We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value  
r=rate of interest  
n=time period.

A=25000*(1.025)^5

=25000*1.13140821

=28285.21(Approx)