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Calculating Payback period and NPV

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You are considering an investment in a project with a life of eight years, an initial outlay $120,000, and annual after-tax cash flows of $52,000. The project also requires an increase in inventories of $22,000. This $22,000 investment in inventory is required at the outset of the project and will be released when the project is completed. The appropriate discount rate for this project is 10%.

a. Calculate the payback period for this project.
b. Calculate the NPV for this project.
c. Should this project be accepted? Explain.

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Solution Summary

Solution describes the steps for calculating payback period and NPV for the given investment proposal.

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Please refer attached file for better clarity of tables and formulas.

Solution:

Year End Cost Additional inventory Cash inflows Net Cash Flow Cumulative cash inflow
0 -120000 -22000 -142000.00 -142000.00
1 52000 52000.00 52000.00
2 ...

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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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