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Unformatted text preview: Exercise # 3 Project Evaluation Methods Payback, NPV and Multi-Attribute Analysis ISDS 4113 ANSWER SHEET 1. Given the following data, calculate: a) the payback period, and b) net present value. Use a discount rate of 10% per year. Time Outflow Inflow Initial Project Cost Beginning of Year 1 $10,000--- End year 1 $1,000 End year 2 $4,000 End year 3 $7,000 a) Payback: Because the inflow amounts are different each year, you cannot use the payback formula shown in the slides but must calculate the amount of unrecovered project costs remaining for each year: At the end of Year 1: $10,000 - $1,000 = $9,000 unrecovered project costs At the end of Year 2: $9,000 - $4,000 = $5,000 unrecovered project costs The remaining $5,000 project costs will be recovered during Year 3 = $5,000/$7,000 = .71 years The payback period is 2.71 years b) NPV: Use the NPV formula shown in the slides NPV = - $10,000 + $1,000/(1.1) 1 + $4,000/(1.1) 2 + $7,000/(1.1) 3 If you perform the calculation (which you do not need to do), NPV = - $10,000 + $909.09 + $3305.79 + $5259.20 = - $525.92 Since NPV (the value of the project in todays dollars) is negative, you would not choose to do this project based on the financial analysis....
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- Spring '08