Question

A company is considering a project that has an up-front cost paid today at t = 0. The project will generate positive cash flows of $56,187 a year at the end of each for the next 5 years. The project’s NPV is $95,484 and the company’s return on the project is 8.4 percent. What is the project’s payback?

Answer 1

We need to first find the initial investment of the project;

npv= pv of all cash inflows-initial investment

95484= 56187/(1+8.4%) +56187/(1+8.4%)^2+56187/(1+8.4%)^3+56187/(1+8.4%)^4+56187/(1+8.4%)^5 -initial investment

initial investment=126509.07 $

Payback is the no of years for the project to get back the initial investment;

In 2 years project will return 2*56187 =112374$

remaining amount= 14135.07 $

This will take 14135.07/56187 years =.251 years

Total payback period=2+.251 =2.251 years