Question #145379

2. Cricket World Cup (CWC) is considering a project proposal which requires an initial investment of $72,625 and it is expected to have net cash flows of $15,000 per year for 8 years. The firm cash flows are discounted at a rate of 12 percent.

a. What is the projectâ€™s Net Present Value (NPV)? (Rounded to 2 decimal places)

b. What is the projectâ€™s discounted payback period? (Rounded to 2 decimal places)

a. What is the projectâ€™s Net Present Value (NPV)? (Rounded to 2 decimal places)

b. What is the projectâ€™s discounted payback period? (Rounded to 2 decimal places)

Expert's answer

a) NPV is the difference between Present value of Cash Inflows and Present value of cash outflows.

NPV = PV of Cash Inflows - PV of Cash Outflows

If NPV > 0 , Project can be accepted

NPV = 0 , Indifference point. Project can be accepted/ Rejected.

NPV < 0 , Project will be rejected

The excel table below shows the the NPV of this project.

b) Discounted payback period.

Discounted Payback period is the period in which initial investment is recovered after considering the time value of money.

Discounted PBP "=" Year in which least "+" ve Closing Balance "+" [ Closing balance at that year / Discounted Cash flow in Next Year ]

If Actual disc PBP ">" Expected disc PBP "-" Project will be rejected

Actual disc PBP </= Expected disc PBP - Project will be accepted

Disc PBP "=" Year in which least "+" ve Closing Balance "+" (Closing balance at that year / Cash flow in Next YearÂ )

"=7\\ years\\ +\\frac{4168.65}{6058.25}\\\\\n=7years+0.69years\\\\\n=7.69years( Is\\ the\\ discounted\\ payback\\ period)\n\n"

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