Once again consider the investment project from Question 7 where QAN is considering a project that requires
Question:
Once again consider the investment project from Question 7 where QAN is considering a project that requires an initial investment of $800m now, but that is expected to generate free cash flows of $300m, $350m and $400m over the next three years. Again, assume an appropriate discount rate for QAN is 11%.
(a) Calculate the discounted payback period (DPBP) for this project. If QAN management require a payback period of two years, should QAN accept or reject the project? Explain your answer. (3 marks)
(b) If you used non-discounted cash flows to calculate the payback period, would you be more likely, or less likely to accept the project? Explain your answer. (1.5 marks)
(c) Given your answers to the DPBP calculation in this question and the NPV calculation in Question 7, do you think QAN should go ahead with the project or not? Explain your answer. (1.5 marks)
(Include enough working to show you understand the calculations.)
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter