Question

Rieger International is attempting to evaluate the feasibility of investing $83,000 in a piece of equipment that has a 5​-year life. The firm has estimated the cash inflows associated with the proposal as: The firm has a 9​% cost of capital.

1          $20,000

2          $30,000

3          $20,000

4          $40,000

5          $20,000
a.  Calculate the payback period for the proposed investment.

b.  Calculate the net present value​ (NPV) for the proposed investment.

c.  Calculate the internal rate of return ​(IRR)​, rounded to the nearest whole​ percent, for the proposed investment.

d.  Evaluate the acceptability of the proposed investment using NPV and IRR. What recommendation would you make relative to implementation of the​ project?

Answer 1

a,

Payback
Year	Cash Inflow	Required Investment	Balance Require
1	20000	83000	63000
2	30000		33000
3	20000		13000
4	40000
5	20000

So balance require is 13,000 whereas in fourth year we received 40,000 so almost required 1/3th of 40,000. So payback period will 3 years & 4 month.

b. Net Present Value of proposed Investment.

Year	Cash Inflow	Factor	PV
1	20000	1.09	18,348.62
2	30000	1.19	25,250.40
3	20000	1.30	15,443.67
4	40000	1.41	28,337.01
5	20000	1.54	12,998.63
		Total PV of cash inflow	100,378.33

Inital investment of $83,000

PV of Cash inflow is $100,378.33, so NPV is positive i.e $17,378.33.

c. By trial & error method we found that IRR is almost to 16%

Year	Cash Inflow	IRR @16%	PV
1	20000	1.16	17,241.38
2	30000	1.35	22,294.89
3	20000	1.56	12,813.15
4	40000	1.81	22,091.64
5	20000	2.10	9,522.26
		Total cash inflow	83,963.32

.d. If IRR is more than the cost of capital then project should be accepted as getting more return as compare to cost of capital So in current scenario IRR - 16% & Cost of capital - 9%. Hence IRR is more as compared to Cost of capital.

Project is good for implementation as getting more return. ie. 16%.