Problem:
Require assistance calculating NPV:
The following data have been collected by capital budgeting analysts at Home Grown concerning an investment in an expansion of the company's product line. Analysts estimate that an investment of $210,000 will be required to initiate the project at the beginning of 2010. Estimated cash returns from the new product line are summarized in the following table; assume that the returns will be received in a lump sum at the end of each year.
Year.....Amount of Cash Return
2010........$90,000
2011.........80,000
2012.........70,000
2013.........60,000
The new product line will also require an investment in working capital of $30,000; this investment will become available for other purposes at the end of the project. Salvage value of machinery and equipment at the end of the product line's life is expected to be $20,000. The cost of capital used in Home Grown's capital budgeting analysis is 10%.
Required:
Q1. Calculate the net present value of the proposed investment. Ignore income taxes.
Q2. Calculate the present value ratio of the investment.
Q3. Calculate the payback period of the investment.