Discounted payback method and profitability index method

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A solar panel production firm, Soleil SA, is considering an investment in new solar production technology. The new investment would require initial funding of €4 million today and further expenditure on manufacturing of €1m in each of the years 6 and 7. The net cash inflow for the years 1 to 4 is €2.34 million per year. Some equipment could be sold at the end of year 5 when the production ends and, together with the cash flows from operation, would produce a net cash flow of €4.85 million. Evaluate the investment using four investment appraisal criteria (NPV Method, Payback Period Method, Discounted Payback Method and Profitability Index Method). The required rate of return of Soleil SA is 12 per cent and Soleil has been known to use a payback period of two years in the past. However, the firm's managers believe that this payback period may be too short.

Reference no: EM132766970

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