Question

A project that costs $3,000 to install will provide annual cash flows of $650 for the next 6 years. The firm accepts projects with payback periods of less than 4 years.

a. what is the project's payback period? (round your answer to 3 decimal places)

c-1. what is project NPV if the discount rate is 2%? (round to 2 decimal places)

d-1. NPV of the project if the discount rate is 11%?

Answer 1

Initial Investment = $3,000
Annual Cash Flows = $650
Useful Life = 6 years

Answer a.

Payback Period = Initial Investment / Annual Cash Flows
Payback Period = $3,000 / $650
Payback Period = 4.615 years

Answer c-1.

Discount Rate = 2%

Net Present Value = -$3,000 + $650/1.02 + $650/1.02^2 + $650/1.02^3 + $650/1.02^4 + $650/1.02^5 + $650/1.02^6
Net Present Value = -$3,000 + $650 * (1 - (1/1.02)^6) / 0.02
Net Present Value = -$3,000 + $650 * 5.601431
Net Present Value = $640.93

Answer d-1.

Discount Rate = 11%

Net Present Value = -$3,000 + $650/1.11 + $650/1.11^2 + $650/1.11^3 + $650/1.11^4 + $650/1.11^5 + $650/1.11^6
Net Present Value = -$3,000 + $650 * (1 - (1/1.11)^6) / 0.11
Net Present Value = -$3,000 + $650 * 4.230538
Net Present Value = -$250.15