[Habert12]

1. A company is considering a new project with a life of 15 years. It requires an initial investment of $5,000 payable immediately .In the first two year it will generate a net cash flow of 2,000 per year receivable at the end of each year. After that its net inflows will be $1,000 per year at the end of the next 13 years.

The company’s cost of capital is 12% per year.

Task 1:(6 Marks)

Calculate the following :

1. Non-discounted payback period ( To the nearest year) …………………Years
2. Net present value ( To the nearest $100)$ ……………….
3. Discounted payback period (To the nearest years)…………… Years

Task 2:( 4 Marks)

Which of the following are weakness that apply to the net present value and which apply to non-discounted payback method of investment appraisal ?

NVP Non discounted payback

It may not consider all of a project cash flows

It requires a knowledge of the cost of capital

It does not measure the project effect on shareholders
wealth

It ignores the time value of money

I am confused with this question also?

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