Your company is considering undertaking a project to expand...

Your company is considering undertaking a project to expand an existing product line. The required rate of return on the project is 8% and the maximum allowable payback period is 3 years. Time 0 1 2 3 4 5 6 Cash Flow $(10,000) $2,400 $4,800 $3,200 $3,200 $2,800 $2,400 Questions Evaluate the project using the following method. Net Present Value should the project be accepted or rejected?

Transcript

00:01 In the given question, the company is thinking of expanding the existing product line.

00:06 Now, for that, they have said that they have a required return rate on the project of 8%.

00:13 So we have been given with required return rate of project and that is 8%.

00:25 And it is also given that at year 0, that is the present point of time, there will be a cost outlay that is the investment of $10 ,000 is required.

00:43 Now if this $10 ,000 is invested in the project, so for the coming six years we have been given some sort of cash flows.

00:51 Now we need to find out the net present value of the project and make a decision whether this project should be accepted or rejected.

01:00 So what we are going to do is, first of all, we are going to find out the present value of the cash flows that we are going to receive from the project for the next six years.

01:14 So this present value of cash flows is equals to the cash flow of the respective year times the present value factor.

01:26 Now, the present value factor in this question is going to be for $1 at the rate of required return rate, that is 8%.

01:36 So this pb factor we can find out by taking 1 upon 1 plus required rate of return to the power n, that is the year for which we are going to determine the pb factor.

01:50 So let's make a table and find out the present value of cash flows.

01:54 So here this table shows the computation of present value of cash flows.

02:02 So at first column we had taken the years and their respective cash flows in the second column.

02:07 So in the third column we need to find out the present value factor of $1 at 8%.

02:13 So the first year, the bb factor is going to be 1 .2 .5.

02:20 So this is going to be 0 .926.

02:25 Similarly for the second year we will be doing 1 divided by 1 .08 to the power 2 and this gives us 0 .857.

02:37 Similarly for the third year if you do we will be having the pb factor of 0 .794.

02:45 For the fourth year we will be having the pv factor of 0 .734...

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