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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)

a

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

1

Accept project as payback period is less than 3 years

b

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

1

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?

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