Financial Analysis

Financial Analysis

Unit 4 IP

incremental cash flows statement of a project for the period of 8 years

Payback Period

Payback period is a method that calculated and tells that how much time it shall take to recover the initial investment, including working capital. In this case, the initial investment is $ 1,200, 000.

By the end of the second year, the business would be able to recover;

$295,875 + $456,750 = $752,625

The unrecovered cost shall be; $1,200,000 - $752,625 = $447,375

Therefore the payback period shall be; 2 + 447,375/456,750 = 2.98 years.

Net Present Value (NPV)

Net Present Value = Present Value - Initial Investment

PV= $ 2,229,365.07

NPV= $ 2,229,365 - $ 1,200, 000 = $ 1,029,365

Accept or Reject the project? Assuming not to accept the project if life is over three years

There are a few Payback period criteria. On the basis of these criteria projects are accepted and rejected. The first criteria states that the project shall be accepted if the payback period is less than the acceptable maximum limit of payback period. Further, the second criteria states; the project shall be rejected if the payback period is more than the acceptable maximum payback period.

Therefore, according to the above mentioned laid down definition of payback, and the given criteria in the case, the project can only be accepted if the payback is less than 3 years. The calculation revealed that the payback of this project is 2.98 years. Thus, the project is acceptable.

In addition to this, the criterion for NPV is that the project shall be accepted of the NPV is greater than 0. Therefore, according to these criteria also the project can be accepted.

If additional investment is required by the project in building and land then how it may influence the decisions?

Additional investment refers to adding up the capital in building and land, ...