Question

5. ULJI,123 dl the end of the next 3 years (Payback period, IRR, & NPV) You are considering a project with an initial cash outlay of $5,213, and expect to receive free cash flows $2,125 at the end of each year for the next 7 years. If required rate of return is 10%, what is the firm's a. Payback period? b. NPV? c. IRR? d. Should this project be accepted? (use answers to parts b and c)

Answer 1

Initial Investment = $5,275
Annual Cash Flow = $2,125
Period = 7 years

Answer a.

Payback Period = Initial Investment / Annual Cash Flow
Payback Period = $5,275 / $2,125
Payback Period = 2.48 years

Answer b.

Required Return = 10%

NPV = -$5,275 + $2,125/1.10 + $2,125/1.10^2 + … + $2,125/1.10^7
NPV = -$5,275 + $2,125 * (1 - (1/1.10)^7) / 0.10
NPV = -$5,275 + $10,345.39
NPV = $5,070.39

Answer c.

Let IRR be i%

NPV = -$5,275 + $2,125/(1+i) + $2,125/(1+i)^2 + … + $2,125/(1+i)^7
0 = -$5,275 + $2,125/(1+i) + $2,125/(1+i)^2 + … + $2,125/(1+i)^7

Using financial calculator, i = 35.47%

IRR of the project = 35.47%

Answer d.

Based on NPV and IRR, this project should be accepted.