1) The Seattle Corporation has been presented with an investment opportunity that will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm’s cost of capital is 10 percent. What is the payback period for this investment?
Payback period
Using the even cash flow distribution assumption, the project will completely recover the initial investment after $30/$35 = 0.86 of Year 5:
Payback = 4 + = 4.86 years.
2) As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:
Project X Project Z
Year Cash Flow Cash Flow
0 -$100,000 -$100,000
1 50,000 10,000
2 &nbs ...