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You are evaluating a project that will cost $486,000, but is expected to produce cash flows of $122,000 per year for 10 years, with the first cash flow in one year
You are evaluating a project that will cost $486,000, but is expected to produce cash flows of $122,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 11.2% and your company's preferred payback period is three years or less. a. What is the payback period of this project? b. Should you take the project if you want to increase the value of the company? a. What is the payback period of this project? The payback period is years. (Round to two decimal places.) b. Should you take the project if you want to increase the value of the company? (Select from the drop-down menus.) If you want to increase the value of the company you take the project since the NPV is positive negative
Expert Solution
1. Payback period is the time it takes to retain the inital cost of investment.
They receives 366000 in 3 years and the remaining 120,000 in 4th year
In 4th year=120,000/122,000=0.98
Payback period=3.98 years
2. Use NPV function to find the NPV. It tells by how much the investors value increases.
=NPV(rate,Year1 to Year10 cashflows)-Year0 cashflow
=NPV(11.2%,Year1 to Year10 cashflows)-486000=$226500.43
==>WILL/since the NPV is POSITIVE
| cost of capital | 11.2% |
| Cashflows | |
| Year0 | -486000 |
| Year1 | 122000 |
| Year2 | 122000 |
| Year3 | 122000 |
| Year4 | 122000 |
| Year5 | 122000 |
| Year6 | 122000 |
| Year7 | 122000 |
| Year8 | 122000 |
| Year9 | 122000 |
| Year10 | 122000 |
| NPV | 226500.43 |
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