Harlem Toyworld Company is considering the purchase of land and the construction of a new plant. The
Question:
Harlem Toyworld Company is considering the purchase of land and the construction of a new plant. The land, which would be bought immediately (at t = 0), has a cost of $120,000 and the building, which would be erected at the end of the first year (at t = 1), would cost $300,000. It is estimated that the firm’s after-tax cash flow will be $250,000 at the end of the second year (the first cash inflow), and this cash flow will increase at a rate of 20% annually over the next three years (ignore all other cash flows thereafter).
(a) What is the approximate payback period for this investment?
(b) If the firm is cost of capital is 10%, calculate the net present value (NPV) of the project.
(c) Give one disadvantage of the Payback Period technique and one disadvantage of the net present value rule for investment decision-making.
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
Step by Step Answer:
Given informaition intial investementto 1200000 Additional Cash flow t1 300000 0892857143 Cash flow ...View the full answer
Managerial Economics
ISBN: 978-0133020267
7th edition
Authors: Paul Keat, Philip K Young, Steve Erfle
