Question

Consider the following cash flow and project balance table:

n 0 1 2 3 An -$10,000 ? ? | 8,000 ? PB(i)n $10,000 -11,000 -8,200 -1,840 3,792 7,550 5

a) Complete the table by calculating i.

b) What is the undiscounted payback period?

c) What is the discounted payback period?

d) What is the NPV at i ?

e) What is the Internal Rate of Return (IRR)?

Answer 1

Solution

a) Complete the table by calculating i.

at year 3, the Present value of $8000 is -1840.So the value if "i" can be calculated as follows:

8000*(1/1+i)^3 = -1840

By solving the above we will get the value of "i" as 20%.

by inserting the i in the equation the table is redrafted below.

n	An	PB(i)n
0	-$10000	-$10000
1	-$13205	-$11000
2	-$11816	-$8200
3	-$3178	-$1840
4	$7867	$3792
5	$18828	$7550

b) What is the undiscounted payback period?

undiscounted payback period = Total capital investment/Total cashflow

Since the cash flows are not sufficient to meet the initial output, the same cannot be computed.

c) What is the discounted payback period?   

Since the cash flows are not sufficient to meet the initial output, the same cannot be computed.   

d) What is the NPV at i ?

NPV @ i, ie @ 20% = -$19698 (Add all the cash flows from year 1 to 5)(-10000+-$11000+-$8200+-$1840+$3792+$7550)

e) What is the Internal Rate of Return (IRR)?

IRR is the rate at which present value of inflow = present value of outflow,ie 0.

Since the amount of inflow are negative,the same cannot be calculated