Project W requires a net investment of $1,000,000 and has a payback period of 5.6 years. You...

Question:

Project W requires a net investment of $1,000,000 and has a payback period of 5.6 years. You analyze Project W and decide that Year 1 free cash flow is $100,000 too low, and Year 3 free cash flow is $100,000 too high.

After making the necessary adjustments:

A) the payback period for Project W will be longer than 5.6 years.

B) the payback period for Project W will be shorter than 5.6 years.

C) the IRR of Project W will increase.

D) the NPV of Project W will decrease.

The payback period is the time required for the initial investment to come back. PBP gives the initial idea of the length in which the initial investment will come back to the firm.

Answer and Explanation:

Increase the initial inflows and lowering the post inflows by same amount will increase the IRR and NPV. If the two changes are within the PBP timeframe it will not affect PBP.

A) the payback period for Project W will be longer than 5.6 years.

- No, the Payback period will remain same

B) the payback period for Project W will be shorter than 5.6 years.

- No, the Payback period will remain same

C) the IRR of Project W will increase

- Yes

D) the NPV of Project W will decrease.

- No, NPV will increase


Learn more about this topic:

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Payback Analysis: Formula & Example

from Introduction to Management: Help and Review

Chapter 16 / Lesson 12
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