Concept explainers
Payback period:
Number of periods required for collecting initial investment is called payback period. It is traditional technique. Payback period uses normal cash flows. Therefore, the
Calculate the payback period by using the following formula:
Decision for payback period:
Discounted payback period:
Number of periods required for collecting initial investment is called discounted payback period. It is a modern technique. Discounted Payback period uses discounted cash flows. Therefore, the time value of money concept is considered.
Calculate the discounted payback period by using the following formula:
Decision for payback period:
Cost of the project is $64,000 and
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Check out a sample textbook solution- (Payback period, net present value, profitability index, and internal rate of return calculations). You are considering a project with an initial cash outlay of$80,000 and expected free cash flows of$20,000 at the end of each year for six years. The required rate of return for this project is 10 percent. What are the project's payback and discounted payback periods? What is the project's NPV? What is the project's PI?arrow_forwardWhat is the ERR for this project? Assume that = 12% and MARR = 20% per year. Is this project considered to be profitable? What is the simple payback period?arrow_forwardAssume an investment has an initial cost of $30,000 and future cash flows of $21,750, $18,500, and $12,500 for years 1 to 3, respectively. What is the NPV if the required return is 13 percent? Should the project be accepted or rejected?arrow_forward
- A firm evaluates a project with the following cash flows. The firm has a 2 year payback period criteria and a required return of 11 percent. Year Cash flow (OMR) -24,000 17,000 12,000 9,000 -8,000 11,000 1 3 4 11. What is the net present value for the project? 12. What is the payback period for the project? 13. What is the discounted payback period for the project? 14. What is the profitability index for the project? 15. Given your analysis, should the fim accept or reject the project?arrow_forwardYou are evaluating a project that costs $75,000 today. The project has an inflow of $ 155,000 in one year and an outflow of $65,000 in two years. What are the IRRs for the project? What discount rate results in the maximum NPV for this project? How can you determine that this is the maximum NPV?arrow_forwardWhat is the payback period on each of the above projects? Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept? Why? If you use a cutoff period of three years, which projects would you accept? Why? If the opportunity cost of capital is 10%, which projects have positive NPVs? How do you know? “If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” Is this statement true or false? How do you know? If the firm uses the discounted-payback rule, will it accept any negative NPV projects? Will it turn down any positive NPV projects? How do you know?arrow_forward
- (Payback period, NPV, PI, and IRR calculations) You are considering a project with an initial cash outlay of $85,000 and expected free cash flows of $20,000 at the end of each year for 7 years. The required rate of return for this project is 9 percent. a. What is the project's payback period? b. What is the project's NPV? c. What is the project's PI? d. What is the project's IRR?arrow_forwardAssume that it costs $1,000 to start a project. If the project will give $400 profit in the first year, $500 in the second year and $300 in the third year. find the payback period. Now assume that the interest rate is 10%, find the net present value (NPV) and the profitability index (PI) for this projectarrow_forwardWhat is the internal rate of return (IRR) of a project that costs $20,070 if it is expected to generate $8,500 per year for three years?arrow_forward
- A firm evaluates a project with the following cash flows. The firm has a 2 year payback period criteria and a required return of 11 percent. Year Cash flow (OMR) -24,000 17,000 12,000 9,000 1 2 3 4 -8,000 11,000 11. What is the net present value for the project? 12. What is the payback period for the project? 13. What is the discounted payback period for the project? 14. What is the profitability index for the project? 15. Given your analysis, should the firm accept or reject the project?arrow_forwardABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NP of the assembler if the required rate of return is 12%. Show calculation. Would you accept/reject a project based on NPV decision criteria? Why? Based on NPV calculated in part A, determine Profitability Index (PI). Show calculation. Would you accept/reject a project based on PI decision criteria? Why?arrow_forwardA project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11%. Requirements: What is the project’s NPV? What is the project’s IRR? What is the project’s PI? What is the project’s payback period? What is the project’s discounted payback period?arrow_forward
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