Question

# Shannon industries is considering a project that has the following cash flows: Year Project cash flow...

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

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).

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