Payback Period/Net Cash Flow/NPV Questions -- Please explain

Submitted by manuspmp on Fri, 10/23/2009 - 18:23

The following should be used for questions 15 through 17
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A project manager is assigned to a project early in the project lifecycle. One of the things that must be done is to do a justification for the project. Since very little information is known about the project, the estimates are considered to be rough estimates. The following table is the project manager’s estimate of the cash flow that will take place over the next five years.
End of Year Cash Flow In Cash Flow Out
1 0 500,000
2 300,000 90,000
3 400,000 100,000
4 100,000 175,000
5 50,000 35,000

15. What is the payback period for this project?
a. One year
b. Two years
c. Three years
d. Four years

16. What is the net cash flow at the end of five years?
a. $50,000
b. - $50,000
c. $850,000
d. $100,000
17. If the net present value for each of the cash flows were calculated at a 10% interest rate, the net present value cash flow at the end of five years would be:
a. Greater than the total cash flow without the net present value applied
b. Less than the total cash flow without the net present value applied

c. The same as the total cash flow without the net present value applied
d. Unable to be calculated with the information supplied

Can anyone please explain me the answers (The answers are the options in BOLD)

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winson

Sun, 10/25/2009 - 14:07

Hi,

 Ya... the question seems to be vague... however, we may still try to figure out the answer...

 15.
This one really not sure. Payback period after 3 years, seems the cash
inflow is 700,000; but outflow is 690,000. So, not really sure why the
answer is 3 years.

 

16. Net cash flow. just get the total of cash in flow - cash outflow for that 5 years, and you will get the -50,000 figure. -ve value indicates net cash outflow.

 

17.  Since 10 interest rate applied, based on the time value of money, it will be always smaller the money in future than today. PV = FV/ (1+r)^n; where PV = present value, FV = future value, r = interest rate, n = year. 

deeparao

Thu, 02/11/2010 - 16:43

Pay Back period is the number of time period it takes to recover your investment.

The initial  Cash Flow Out is 500,000.

The third year shows an End of Year Cash Flow In=400,000 Cash Flow Out 100000

They have recovered 400,000 of there investment.

May be that's the reason they say 3 years

cplusplus

Sun, 02/14/2010 - 10:45

The Payback Period (PP) is perhaps the simplest method of looking at one or more investment projects or ideas. The Payback Period method focuses on recovering the cost of investments. PP represents the amount of time that it takes for a capital budgeting project to recover its initial cost.
 

The Payback Period Calculation is as follows:

 

          The Costs of Project / Investment

PP =   ----------------------------------------

                    Annual Cash Inflows


The PP concept holds that all other things being equal, the better investment is the one with the shorter payback.
 

Example of a Payback Period calculation:


For example, take a project costing a total of $200,000. The expected returns of the project amount to $40,000 annually. PP would be $200,000 ÷ $40,000 = 5 years.


PP certainly has the virtue of being easy to compute and easy to understand. But that very simplicity carries weaknesses with it. There are al least two major problems associated with the Payback Period model:

1) PP ignores any benefits that occur after the Payback Period, and so does not measure total incomes
2) PP ignores the time value of money

niteshrs

Thu, 05/12/2011 - 12:14

The annualized returns from investments amounts to $-50000 at the end of 5th year. Investment on the project + Total Cash Inflows - Total Cash Outflows at the end of year (EOY) will give the returns from the project.


In the above example, the amount invested at the start of project, that is in the first year, is returned by the end of 3rd year.


 





































End of Year  Cash Flow In  Cash Flow Out Inflow-Outflow
1 0 500,000 -500,000
2 300,000 90,000 -290,000
3 400,000 100,000 10,000
4 100,000 175,000 -65,000
5 50,000 35,000 -50,000

 


The net cash flow at the end of 5th year is $-50,000

jhonlee

Tue, 12/20/2011 - 12:11


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