Your company is evaluating an investment opportunity that will require an initial cash outlay of $10,000. It is anticipated that the investment will generate $2,000 in added annual revenues for 10 years. The cost of capital for the project is 10%.
1A. Determine the payback period on the investment.
1B. How would you adjust the project cash flows for discounted payback period? (Give a brief explanation of how the discounted payback period would differ from payback period)
Calculate the Net Present Value of the project:
2A. Calculate the present value of the cash flows from the project.
2B. Calculate the present value of the cash flows, net of the initial investment.
3. Calculate the Internal Rate of Return of the project (to within one decimal place).
Examples of cash flow considerations: (based on the project described above)
For each of the project details provided below, indicate whether
1) It should be included in calculating the company’s NPV for the project, and
2) How the data should be included (as part of the initial investment, the project’s cash flows, or interest rate)
a. As a maintenance project, the project’s risk will be 3% lower than the typical investment for the company.
b. The company will need to pay maintenance costs of $500 a year.
c. $5,000 of the initial investment is for a piece of equipment that the company owns and would not otherwise use.
d. Closing the project will cost the company an additional $3,000 in the final year of the project