The cash payback period is that period which cash for the investment project is borrowed and that time which is to be paid back. Therefore, the cash payback period will be;
Cash payback period = Initial CostAnnual Cashflow = 750,000/170,000 = 4years 5 months
The net present value of the project refers to the present values of an investment especially using time to evaluate an investment. Therefore it is given by;
Net present value; 1st year = (750,000 × 12%) = 90,000
2nd year = (840,000 × 12%) = 100,800
3rd year = (940,800 × 12%) = 112,896
/>
4th year = (1,053,696 × 12%) = 126,443.52
5th year = (1,180,139.52 × 12%) = 141,616.74
Therefore, net present value = (1,180,139.52 + 141,616.74) = $1,321,756.30
The project’s cash flow indicates a cash outflow as it is indicated by the negative sign and that the investment is yet to reach profitability. The project should be accepted as the payback period indicates the investment will take 4 years 5 months to pay back the initial investment cost which is less than the life of the project.
Pay back is the period of investment in which is taken to pay back the initial ploughed in cash into the project. The company’s policy of not accepting projects with life of over 3 years locks out the possibility of this particular project to be accepted by the company. Therefore, the project would not be accepted.
References
Peterson, P. P., & Fabozzi, F. J. (2002). Capital budgeting: Theory and practice. New York, NY: Wiley.
Shapiro, A. C. (2005). Capital budgeting and investment analysis. Upper Saddle River, NJ: Pearson/Prentice Hall.
Bierman, H., & Smidt, S. (1975). The capital budgeting decision: Economic analysis and financing of investment projects. New York: Macmillan.
Weingartner, H. M. (1963). Mathematical programming and the analysis of capital budgeting problems. Englewood Cliffs, N.J: Prentice-Hall.
Hunt, P. (1964). Financial analysis in capital budgeting. Boston: Graduate School of Business Administration, Harvard University.
