Question

Shannon industries is considering a project that has the following cash flows:

Year Project cash flow

0 $-6,240

1 $1,980

2 $3,750

3 ?

4 $1,000

The project has a payback of 2.85 years.

The firm's cost of capital is 10 percent. what is the project's net present value (NPV)?

a) 874.87

b) -146.92

c) 436.96

d) 727.95

e) -207.02

Answer 1

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

Year	Cash flows	Cumulative cash flows
0	(6240)	(6240)
1	1980	(4260)
2	3750	(510)
3	x	-510+x
4	1000	490+x

2.85=2+(510/x)

x=510/(2.85-2)

=$600

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=1980/1.1+3750/1.1^2+600/1.1^3+1000/1.1^4

=$6032.98

NPV=Present value of inflows-Present value of outflows

=$6032.98-$6240

WHICH IS EQUAL TO

=$(207.02)(Approx)(Negative).