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Homework answers / question archive /  Barclay plc is assessing an investment project

 Barclay plc is assessing an investment project

Finance

 Barclay plc is assessing an investment project. The estimated cash flows are as follows: 
Year                    £m

0                          10        Outflow

1                           5           Inflow

2                           4           Inflow

3                           3            Inflow

4                           2            Inflow 
The business's cost of finance is 15 per cent p.a. and it seeks projects with a three-year maximum discounted payback period. 
Should the project be undertaken on the basis of NPV and discounted PBP? 
 

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NPV = £0.49 m

Discounted payback period = 3.57 years

Since, the NPV is positive so, the project should be undertaken.

But the discounted payback period is higher than the maximum payback period (3 years) so, the project should not be undertaken.

We should accept the project on the basis of NPV because it depends on time value of money. So, the project should be accepted.

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