Question

Evergreens Corp. is attempting to evaluate a $129,000 investment in a machine with a 5-year life. The firm has estimated the cash inflows associated with the proposal as shown below. The firm has a 10% cost of capital End of Year (t) Cash Inflows (CF) $15,000 22,000 29,000 32,500 38,000 a. Calculate the payback period for the proposed investment. (2 points) b. Calculate the NPV for the proposed investment. (2 point) c. Calculated the IRR for the proposed investment. (2 point) d. Evaluate the acceptability of the proposed investment using NPV and IRR. What recommendation would you make relative to implementation of the project? Why? (2 point)

Answer 1

A) payback period

Year	cash flow	cumulative cash flow
0	(129,000)	(129,000)
1	15,000	(114,000)
2	22,000	(92,000)
3	29,000	(63,000)
4	32,500	(30,500)
5	38,000	7,500

Payback period = full year until recovery + uncovered cost until the beginning of last year / cash flow in last year

= 4 + 30,500/ 38,000

= 4 + 0.8026

= 4.80 years

B) Using financial calculator to calculate Npv

Inputs: C0 = -129,000

C1 = 15,000. Frequency = 1

C2 = 22,000. Frequency = 1

C3 = 29,000. Frequency = 1

C4 = 32,500. Frequency = 1

C5 = 38,000. Frequency = 1

I = 10%

Npv = compute

We get , NPV = -$ 29,600.74

C) using financial calculator for calculating Irr

Inputs : same as Npv except there will not be any 'i' .

Irr = compute

We get, Irr = 1.68%

D) We should not accept the project based on both Npv and irr.

This is because the Npv is negative and Irr is less than discount rate.