FINA 425 week 4 IP

# The payback period for the business can be determined

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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:

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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.
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