The payback period for the business can be determined

Info icon This preview shows pages 3–5. Sign up to view the full content.

View Full Document Right Arrow Icon
The payback period for the business can be determined by subtracting the net cash flow from the initial investment throughout the years. The business is projected to see a net cash flow of $244,500 each year. With this value, we can see that the investment can be paid off in less than four years. After the third year, the business only has an initial investment to repay of $16,500. If this value is divided by the total cash flow of that year, we would get the exact time it took to repay the investment:
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Individual Project 4 4 3 + ($16,500 / $244,500) 3 + 0.067 Payback period = 3.07 years The net present value for each year can also be determined by calculating the present value for each year and then totaling the amount for each year with the initial investment. The formula to calculate the present value for each year is as follows: Present value = Net Cash Flow / (1 + Rate of Return) ^ n n = value of year in which the cash flow is being calculated for With this formula, the present value for each year is calculated: Year 1 = $218,303.57 Year 2 = $194,913.90 Year 3 = $174,030.27 Year 4 = $155,384.17 Year 5 = $138,735.87 Investment = -$750,000 Net Present Value = $131,367.78 With the payback period projected at 3.07 years and a net present value of the business being $131,368 after 5 years, I would recommend that this projected by accepted. The return on the project is valued to be high and after the fifth year is over, the business will have made a profit of $472,500. If the business has a policy of not accepting projects with a payback period of over 3 years, then this business should be rejected. However, considering that the NPV and the overall cash flow after the third year will be high, it would be unwise to refuse this project only because the payback period ran over the threshold by less than one month.
Image of page 4
Individual Project 4 5 References Payback Period. (n.d.). Investopedia. Retrieved from http://www.investopedia.com/terms/p/paybackperiod.asp#axzz2NB1xKFq6 Net Present Value. (n.d.). Business Dictionary. Retrieved from http://www.businessdictionary.com/definition/net-present-value-NPV.html
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern