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NPV (Discount Rate, Range of Values) +investment

a) The traditional payback period (PbP) is 3.6 years. b) The discounted payback period (DPB) is 4.84 years. c) Yes, the project should be purchased since the payback period (3.6 years) is less than the required rate of return (11% or 3.6 years). The discounted payback period of 4.84 years is also less than 5 years.

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74 views7 pages

NPV (Discount Rate, Range of Values) +investment

a) The traditional payback period (PbP) is 3.6 years. b) The discounted payback period (DPB) is 4.84 years. c) Yes, the project should be purchased since the payback period (3.6 years) is less than the required rate of return (11% or 3.6 years). The discounted payback period of 4.84 years is also less than 5 years.

Uploaded by

Ngân Nguyễn
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We take content rights seriously. If you suspect this is your content, claim it here.
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* NPV(discount rate, range of values)+investme

Discount rate 7%

Cash flows investment 1 Cash flows investment 2


$ 100,000 $ 100,000
$ 25,000 $ 20,000
$ 25,000 $ 20,000
$ 25,000 $ 20,000
$ 25,000 $ 20,000
$ 25,000 $ 20,000
$ 25,000

Net Present Value $ 222,841.93 Net Present Value $ 222,416.13


es)+investment

so accept 1
RRR 5%

Year Outflows Inflows Net Cash Discount Factor Discounted Cash


0 $ (10,000) $ - $ (10,000) 1 $ (10,000)
1 $ 1,500 $ 1,500 0.952380952380952 $ 1,429
2 $ 1,500 $ 1,500 0.90702947845805 $ 1,361
3 $ 1,500 $ 1,500 0.863837598531476 $ 1,296
4 $ 1,500 $ 1,500 0.822702474791882 $ 1,234
5 $ 1,500 $ 1,500 0.783526166468459 $ 1,175
6 $ 1,500 $ 1,500 0.746215396636627 $ 1,119
7 $ 1,500 $ 1,500 0.710681330130121 $ 1,066
8 $ 1,500 $ 1,500 0.676839362028687 $ 1,015
9 $ 1,500 $ 1,500 0.644608916217797 $ 967
10 $ 1,500 $ 1,500 0.613913253540759 $ 921
$ 5,000 NPV= $ 1,583
Year 0 1 2 3 4
Nominal Amount $ (1,000) $ 400 $ 400 $ 400 $ 400
Discount rate (WACC) 20%
Net Present Value 35
Denominator 1.2 1.44 1.728 2.0736
Present Value $ (1,000) $ 333 $ 278 $ 231 $ 193
Net Present Value

Internal Rate of Return 22%


Year 0 1 2 3 4
Nominal Amount $ (1,000) $ 400 $ 400 $ 600 $ 600
Discount rate (WACC) 20%
Net Present Value 35
Denominator 1.2 1.44 1.728 2.0736
Present Value $ (1,000) $ 333 $ 278 $ 347 $ 289
Net Present Value

Internal Rate of Return 32%


Compute both the traditional payback period (PbP) and the discounted payback period (DPB) fo
$270,000 if it is expected to generate $75,000 per year for five years? The firm's required rate of
Should the project be purchased?

Given Solution
Year CF Year CF Balance
0 $ (270,000) 0 $ (270,000) $ (270,000)
1 $ 75,000 1 $ 75,000 $ (195,000)
2 $ 75,000 2 $ 75,000 $ (120,000)
3 $ 75,000 3 $ 75,000 $ (45,000)
4 $ 75,000 4 $ 75,000 $ 30,000
5 $ 75,000 5 $ 75,000 $ 105,000
r 11% a) PbP/ PB 3.60 3.60
way2 way1
Find
a) PbP/ PB ? c) Should the project be purchased?
b) DPbP/ DPB ?
c) Should the project be purchased?
payback period (DPB) for a project that costs
he firm's required rate of return is 11 percent.
ed?

Year CF PV of CF Balance
0 $ (270,000) $ (270,000) $ (270,000)
1 $ 75,000 $67,567.57 $ (202,432)
2 $ 75,000 $60,871.68 $ (141,561)
3 $ 75,000 $54,839.35 $ (86,721)
4 $ 75,000 $49,404.82 $ (37,317)
5 $ 75,000 $44,508.85 $ 7,192
years b) DPbP/ DPB 4.84 years

Yes PB < DPB

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