Question

Your required rate of return is 10 percent. If you invest $3,000 today you will have the following cash inflows: 2000 at t=1, 500 at t=2, 2000 at t=3, and 2000 at t=4. Compute the Discounted Payback Period of the project.

Compute the NPV of a project with the following information. The IRR is 9%. The project life is 3 years. The initial cost is $19,000. In years 1 and 2 the cash inflows are $4,500 and $5,500, respectively. Cash flow in year 3 is missing. WACC is 12%.

Answer 1

DISCOUNTED PAYBACK:
Year	Cash flow	PVIF at 10%	PV at 10%	Cumulative PV
1	2000	0.90909	1818	1818
2	500	0.82645	413	2231
3	2000	0.75131	1503	3734
4	2000	0.68301	1366	5100
Discounted payback = 2+(3000-2231)/(1503) = 2.51 Years.
NPV:
IRR is that discount rate for which NPV = 0.
That is -19000+4500/1.09+5500/1.09^2+x^1.09^3 = 0
where x = 3rd year cash flow.
x = (19000-4500/1.09-5500/1.09^2)/1.09^3 =				7909
Third year cash flow = $7909.
NPV at 12%:
Year	Cash flow	PVIF at 12%	PV at 12%
0	-3000	1	-3000
1	4500	0.89286	4018
2	5500	0.79719	4385
3	7909	0.71178	5629
		NPV	11032