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A project has an initial cash outflow of $12,000 followed by six equal annual cash inflows, commencing in one year’s time. The payback period is exactly four years. The cost of capital is 12% per year.
10. What is the project’s net present value (to the nearest $)?
When I try to calculate it using the discounted payback period I get NPV=4240, while the answer is 333. How is 333 the answer?
The question does not ask for the discounted payback period. It asks for the NPV.
If the payback period is exactly 4 years, the cash inflow must be 12,000/4 = $3,000 per year.
So the cash flows are an outflow of 12,000 at time zero followed by 3,000 per year for years 1 to 6.
We discount the 3,000 from 1 to 6 using the 6 year annuity factor at 12%.
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