A firm invested cash Rs.198,000 on a project. It is forecasted that following cash flow will generate by this project in coming 7 years. Firm cost of capital is 10%.

 

Year                 Cash Inflow

1.              Rs. 40,000
2.                   55,000
3.                   60,000
4.                   45,000
5.                   50,000
6.                  18,000
7.                  12,000

Use above information to calculate Simple Payback period?

Use above information to calculate Discounted payback period?

Use above information to calculateNPV?

Answer:

• 1) Simple Payback period = 3.96 Years
• 2) Discounted payback period = 5.92 Years
• 3) NPV = 6997.17

Step-by-step explanation

Part 1

Simple Payback period = Period at which cumulative cash flow gets Positive i.e greater than 0

Simple Payback period = 3+43000/45000

Simple Payback period = 3.96 Years

Part 2

(1+r) = (1+10%)

(1+r) = 1.1

Discounted payback period = Period at which cumulative Discounted cash flow gets Positive i.e greater than 0

Discounted payback period = 5+9321.26/10160.53

Discounted payback period = 5.92 Years

Part 3

(1+r) = (1+10%)

(1+r) = 1.1

NPV = CF0 + CF1/(1+r) + CF2/(1+r)²   + CF3/(1+r)³  + CF4/(1+r)⁴  + CF5/(1+r)⁵ + CF6/(1+r)⁶  + CF7/(1+r)⁷ 

NPV = -198000 + 40000/1.1 + 55000/1.1^2 + 60000/1.1^3 + 45000/1.1^4 + 50000/1.1^5 + 18000/1.1^6 + 12000/1.1^7

NPV = 6997.17