Question

An investment under consideration has a payback of seven years and a cost of $875,000. assume the cash flows are conventional. if the required return is 11 percent, what is the worst-case npv?

Answer 1

The worst-case NPV can be calculated by discounting the cash flows using the required rate of return. The payback period of seven years means that the investment will break even in seven years. To calculate the worst-case NPV, discount the cash flows to their present value using the required rate of return.

Step-by-step explanation:

The worst-case NPV (Net Present Value) can be calculated by discounting the cash flows using the required rate of return. In this case, the required return is 11 percent.

Assuming the cash flows are conventional, the payback period of seven years means that the investment will break even in seven years.

To calculate the worst-case NPV, we need to discount the cash flows to their present value using the required rate of return.

Year 1: Cash flow = -$875,000
Present value = -$875,000 / (1 + 0.11)1

Year 2: Cash flow = -$875,000
Present value = -$875,000 / (1 + 0.11)2


Year 7: Cash flow = -$875,000 + $875,000 = $0
Present value = $0

Once we have the present values for each cash flow, we can sum them up to calculate the worst-case NPV.

Worst-case NPV = Present value of Year 1 + Present value of Year 2 + ... + Present value of Year 7

Answer 2

Net present value (NPV) analysis is useful for determining the current value of a stream of cash flows that extend out into the future. To calculate net present value, we use the following formula:

NPV = X * [(1+r)^n - 1]/[r * (1+r)^n]

Where:

X = The amount received per period

n = The number of periods

r = The rate of return

npv = 875,000 * [(1+0.11)^7 - 1]/[0.11 * (1+0.11)^7]

= $ 7,954, 545