Question

# An investment project generates after-tax cash flows of \$5,000 per year for the next 10 years....

An investment project generates after-tax cash flows of \$5,000 per year for the next 10 years. Suppose the payback period for the project is 5 years and the appropriate discount rate is 15 percent. What is the initial cost of the project?

a. \$25,000 b. \$32,167 c. \$30,000 d. \$16,761

Please provide the formula you used and numbers you plugged in to get the answer.

Answer to Question is Option"a" i.e "\$25,000"

We are considering the Payback Period without the effect of Discounting Factor as the Payback Period with Discounting Factor is called "Discounting Payback Period".

Since the Pay Back Period is 5 Years, it means the Amount Invested as "Initial Cost of the Project" will be recovered at the end of 5 Years, if we have the after-tax cash inflows \$5000 per year then we will recover \$5000 Per Year X 5 Years = \$ 25,000 in total. So the formula is "After-Tax Cash Inflow X Payback Period"

1. After-Tax Cash Inflows = \$ 5,000

2. Payback Period = 5 Years

Initial Cost of Projects = \$ 25,000 (\$5,000 X 5)

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