Task: XYZ is evaluating a project with the following annual net cash flows:
0 year=-$600
1 year=$50
2 year=$100
3 year=$150
4 year=$350
5 year=$100
Question 1) XYZ is a small company with limited resources, its managers are concerned about how capital will be tied up in projects. What is the project's payback period? Assume XYZ's cash flows are spaced evenly throughout the year
Question 2) Some of XYZ's managers use a general guideline when evaluating projects: accept projects that pay back their investment in less than four years. If you use this payback rule to evaluate the project described above, should XYZ accept the project?
Question 3) If the project's WACC is 11.3%, what is its NPV?
Question 4) If XYZ managers decide to accept the project based on its impact on shareholder value, should they accept the project?
Question 5) You are evaluating the project with cash flows as shown below. Your boss has asked you to calculate the project's NPV. You don't know the project's initial cost, but you have been informed that the project's payback period is 3.5 years.
0 years=
1=$500
2=$800
3=$800
4=$800
5=$600
If the project's WACC is 11.3%, what is its NPV?