Assume that you are a financial analyst for Tangshan Mining Company and are given the following information...

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Finance

Assume that you are a financial analyst for Tangshan Mining Companyand are given the following
information about the firm’s new project: the project’s initialafter-tax cost at t = 0 is $8,000,000 and
the project is expected to provide after-tax operating cash inflowsas follows:
Year
Cash Inflow:
One
$2,800,000
Two
$2,900,000
Three
$3,200,000
Four
$1,800,000
a. Calculate the payback period for this project.
1. If the maximum acceptable payback period is 3years, should this project be accepted? Why or
why not?
b. Assume that the firm’s “Weighted Average Cost of Capital” (WACC)is 6%. Calculate the
“Net Present Value” (NPV) for the above project.
1. Based on your NPV calculations above, should this project beaccepted? Why or why not?

Answer & Explanation Solved by verified expert

4.2 Ratings (914 Votes)

Project
Year	Cash flow stream	Cumulative cash flow
0	-8000000	-8000000
1	2800000	-5200000
2	2900000	-2300000
3	3200000	900000
4	1800000	2700000

Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 2 and 3
therefore by interpolation payback period = 2 + (0-(-2300000))/(900000-(-2300000))
2.72 Years

Accept project as payback period is less than 3 years

Discount rate	6.000%
Year	0	1	2	3	4
Cash flow stream	-8000000	2800000	2900000	3200000	1800000
Discounting factor	1.000	1.060	1.124	1.191	1.262
Discounted cash flows project	-8000000.000	2641509.434	2580989.676	2686781.706	1425768.594
NPV = Sum of discounted cash flows
NPV Project =	1335049.41
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Accept project as NPV is positive

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Transcribed Image Text

Assume that you are a financial analyst for Tangshan Mining Companyand are given the followinginformation about the firm’s new project: the project’s initialafter-tax cost at t = 0 is $8,000,000 andthe project is expected to provide after-tax operating cash inflowsas follows:YearCash Inflow:One$2,800,000Two$2,900,000Three$3,200,000Four$1,800,000a. Calculate the payback period for this project.1. If the maximum acceptable payback period is 3years, should this project be accepted? Why orwhy not?b. Assume that the firm’s “Weighted Average Cost of Capital” (WACC)is 6%. Calculate the“Net Present Value” (NPV) for the above project.1. Based on your NPV calculations above, should this project beaccepted? Why or why not?

Year	Cash Inflow:
One	$2,800,000
Two	$2,900,000
Three	$3,200,000
Four	$1,800,000