Question

Suppose Praxis Corporation’s CFO is evaluating a project with the following cash inflows. She does not know the project’s initial cost; however, she does know that the project’s regular payback period is 2.5 years.

Year	Cash Flow
Year 1	$375,000
Year 2	$400,000
Year 3	$400,000
Year 4	$400,000

If the project’s weighted average cost of capital (WACC) is 8%, what is its NPV?

$343,038

$261,362

$392,044

$326,703

Answer 1

	Year	Cash flow
	1	375000
	2	400000
	3	400000
	4	400000
Since payback period is 2.5 year
therefore intitial investment = 375000+400000+400000*0.5
		975000
Now we can compute the NPV
year	Cash flow	PVIF @ 8%	Present value
0	-975000	1	(975,000)
1	375000	0.925925926	347,222
2	400000	0.85733882	342,936
3	400000	0.793832241	317,533
4	400000	0.735029853	294,012
NPV =			326,703
answer =	326,703