Question

Siemens AG invests €80,000,000 to build a manufacturing plant to build wind turbines. The company predicts net cash flows of €16,000,000 per year for the next 8 years. Assume the company requires an 8% rate of return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Round your present value factor to 4 decimals.) (1) What is the payback period of this investment? (2) What is the net present value of this investment?

Answer 1

a) the payback period of this investment = 5.00 years

b) Net Present Value is €11,945,600

Step-by-step explanation:

From the given information:

a)

The payback period of this investment is determined by using the formula:

Payback Period = Cost of investment/ annual net cashflow

Payback Period = €80,000,000/€16,000,000

Payback Period = 5.00 years

Thus; the payback period of this investment = 5.00 years

b) What is the net present value of this investment?

The net present value of the investment is computed in the table below

interest rate of return i = 8%

no of year n = 8 years

The PV factor is for 8 years and 8% is:

Year 8% factor rate

1 0.9259

2 0.8573

3 0.7938

4 0.7350

5 0.6806

6 0.6302

7 0.5835

8 0.5403

5.7466

Cash Flow Select Chart Amount × PV Factor = PresentValue

Annual Table B1 16,000,000 × 5.7466 = 91,945,600

CashFlow (Using Excel)

Net Cash

Inflow 91,945,600

Less:

Investment 80,000,000

Net Present 11,945,600

Value