Question
XYZ firm is a technology firm operating in a sector which is highly competitive and disruptive. The management has identified an investment in a new
XYZ firm is a technology firm operating in a sector which is highly competitive and disruptive. The management has identified an investment in a new technology that will result in substantial savings. The investment in the new project is $ 10 million. The project delivers the cash flow starting year 1 as follows for the next 5 years: $ 1, 4, 6, 2, and 1 million. You are in the board meeting and want to understand the time taken for the deployed capital to come back to you. The firm is operating in a country that has traditionally high discount rates. The opportunity cost of capital for the investors in this firm is 15%.
a. Compute the payback period and the discounted payback period that you would communicate to the management.
b. Suppose, in a country with negative benchmark rates, a similar investment would have an opportunity cost of capital of 2%. Will there be any adjust-ments to the payback and discounted payback periods communicated to the management in such a scenario, why ?
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