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Investment appraisal under uncertainty

Question 6

Discounted payback

A company is currently evaluating a project which requires investments of
$10,000 now and a further $3,000 at the end of year 1. There will be a net cash
inflow of $15,000 at the end of year 2 and $3,000 at the end of year 3.

The cost of capital is 10%.

What is the discounted payback period (DPP) and net present value (NPV) for
the project?

d.f 10% PV Cumulative

t0 (10,000) 1 (10,000) (10,000)
t1 (3,000) 0.909 (2,727) (12,727)

t2 15,000 0.826 12,390 (337)
t3 3,000 0.751 2,253 1,916

NPV 1,916

The payback period is 2 years + (337/2,253) years = 2.15 years

Illustrations and further practice

Now work through illustration 1 and try TYU question 5 from Chapter 6

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