There is an equal chance that it will be a hit or failure (probability = 50%). (Ignore taxes, give an approximate answer), Hammer Company proposes to invest $6 million in a new type of hammer-making equipment. What is the project payback period if the initial cost is $5,400? If you would like to change your settings or withdraw consent at any time, the link to do so is in our privacy policy accessible from our home page.. We also reference original research from other reputable publishers where appropriate. You have come up with the following estimates of the project's cash flows (there are no taxes): Revenues Costs Pessimistic 15 8 Less likely 17 8 Most likely 20 8 Optimistic 25 8 Suppose the cash flows are prepetuities and the the cost of capital is 10%. False The calculation could be more complicated if the equipment was expected to have any value left at the end of its life, but in this example, it is assumed to be worthless. Generally, postaudits are conducted for large projects: shortly after the project has begun to operate. 13.33% c. 9.92% d. 50%. The corporate tax rate is 30% and the cost of capital is 15%. -100, -50, +80. April 28, 2023 David Carroll. It's similar to determining how much money the investor currently needs to invest at this same rate in order to get the same cash flows at the same time in the future. A project has an initial investment of 100. Round your answer to 2 decimal. NPV = 0) volume per year. NPV = -\$1,000,000 + \$1,242,322.82 = \$242,322.82 Round the answer to two decimal place, A project has an initial outlay of $2,391. And the future cash flows of the project, together with the time value of money, are also captured. IV) Scenario Analysis, I) To understand the project better II) To forecast expected cash flows III) To assess the project risk. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Let's connect. 322.82 Required: What is the discounted payback period for these cash flows if the initial cos, 1. However, if the cost of capital can be reduced to 5% then the present net worth of this same cash flow would become 23,810 USD signalling a more efficient use of capital so it would be worthwhile to undertake the business venture. In 20X6-20X7, it incurred expenditure of $200 million on seismic studies of the area and $500 million on equipment, etc. A Refresher on Net Present Value., Terry College of Business at the University of Georgia, via YouTube. What is the project payback period if the initial cost is $3,200? A financial calculator costs $10 per unit to manufacture and can be sold for $30 per unit. 1. You have come up with the following estimates of the project's cash flows: Suppose the cash flows are perpetuities and the cost of capital is 10%. The payback period,or payback method, is a simpler alternative to NPV. For instance, a $2,000 investment at the start of the first year that returns $1,500 after the first year and $500 at the end of the second year has a two-year payback period. The following are drawbacks of sensitivity analysis except: it provides additional information about the project that is useful. A firm has a WACC of 13.91% and is deciding between two mutually exclusive projects. What is the internal rate of return (IRR) for the project? (Enter 0 if the project never pays back). A project requires an initial investment of $290,000. Question 1 Fixed costs are $3 million a year. An investment project provides cash inflows of $935 per year for eight years. Get access to this video and our entire Q&A library, Internal Rate of Return Method: Definition & Calculation. Most Likely 20 8 12 120 =12/0.1 100 20 The definition of net present value (NPV), also known as net present worth (NPW) is the net value of an expected income stream at the present moment, relative to its prospective value in the future meaning it is discounted at a given rate. By clicking Accept All Cookies, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts.