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Investments - Payback Period and NPV

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.

Solution Preview

Some discussion of basics

The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision.
Decisions like the change in the methods of sales distribution, or an advertisement campaign or research and development programs have long-term implications for the firm's expenditures and benefits, and therefore, they should also be evaluated as investment decisions. Several different procedures are available to analyze potential business investments. Some concepts are better than others when it comes to reliability but all provide enough information to get the general ...

Solution Summary

The solution discusses investments. The payback period and NPV are determined.

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