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Payback and NPV

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Ford Motor spends $2,000,000 on a new conveyor system in an old plant. It calculates that the cash flows for the next five years (profit after taxes plus depreciation) are as follows. Assuming that the equipment will be abandoned after the five year period, calculate payback and Net Present Value. The cost of capital is 10%

Year cash flow PVF PV

1 $600,000
2 $600,000
3 $500,000
4 $400,000
5 $300,000

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Solution Summary

The solution explains how to calculate the payback and NPV of the given project.

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Payback period is the time taken to recover the initial investment
Initial investment is 2,000,000
In year 1,2 and 3 we recover 600,000+600,000+500,000 = 1,700,000
The remaining 300,000 is recovered in year ...

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