441 Words2 Pages

Fin 3322: Cashman Investment Rules
1. Given the following cash flows for project Z: C0 = -2,000, C1 = 600, C2 = 2160 and C3= 6000, calculate the discounted payback period for the project at a discount rate of 20%.
Discounted C0 = -2,000
Discounted C1 = 600/1.2 = 500
Discounted C2 = 2,160/1.2^2 = 1,500
Discounted C3 = 6,000/1.2^3 = 3,472.22
The discounted payback period for the project is 2 years
2. Bill’s Biotech Co. is considering buying a new incubator that will cost $54,200 today. Net cash flows from the incubator will be $20,608 at the end of each year for the next five years. Also, at the end of the fifth year, Bill estimates he can sell the incubator for $13,200. If Bill’s opportunity cost of capital is 15%. a) What is the incubator’s payback period? Cash flow is an equal amount each year, so payback = (54,200/20,608) = 2.63 years. b) What is the incubator’s discounted payback period?
|Year |0 |1 |2 |3 |4 |5 |5 |
|Cash Flow |-54,200 |20,608 |20,608 |20,608 |20,608 |20,608 |13,200 |
| | | | | | | | |
|PV | |17,920 |15,582.61 |13,550.09 |11,782.69 |10,245.82 |6,562.73 |
Discounted payback = 3.61 years c) What is the NPV of investing in the incubator?
N = 5; I/Y = 15; PV = ? ; PMT = 20,608; FV = 13,200 PV = 75,643.95 NPV = 75,643.95 – 54,200 = 21,443.95
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