a. The PP (payback period) for producing the photos and selling them at markets can be calculated as follows: Total initial investment = \(3000 + \)2000 + \(1500 = \)6500 Annual cash inflows = \(25,000 Payback period = Total initial investment / Annual cash inflows = \)6500 / $25,000 = 0.26 years or approximately 3 months
b. To calculate NPV (net present value), we need to discount all future cash flows to their present value using a chosen discount rate. Assuming a discount rate of 7%, the calculation would be as follows:
Year 1: -\(6,500 + (\)25,000 / 1.07) = \(18,318.69 Year 2: (\)25,000 / 1.07^2) = \(21,118.31 Year 3: (\)25,000 / 1.07^3) = \(24,037.91 Year 4: (\)25,000 / 1.07^4) = \(27,087.96 Year 5: (\)27,087.96 + \(2,000 - \)22,000) / (1.07^5) = $4,418.54
NPV = Sum of present values - Initial Investment = (\(18,318.69 + \)21,118.31 +\(24,037.91 +\)27,087.96+ \(4,418.54) - \)6,500 = $84,983
Therefore the NPV for the project is positive and amounts to approximately $84k.
c.In my opinion Eloise should undertake this project because it has a positive NPV of approximately AUD84k which indicates that her investment will generate more than required return on investment and she can earn a good profit. Also, the project has a short payback period of 3 months which means that Eloise can recover her initial investment quickly.
However, it is important to note that this analysis does not take into account potential risks such as changes in market demand or competition. Eloise should consider these factors before making a final decision. Additionally, ARR (accounting rate of return) could also be calculated and used as another factor for consideration.
