Question

6.   A project has the following cash flows. What is the payback period?

7.   Delta Mu Delta is considering purchasing some new equipment costing $373,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. Projected net income for the four years is $16,900, $25,300, $27,700, and $18,400. What is the average accounting rate of return?

Year Cash Flow -$28,000 11,600 11,600 6,500 6,500

8.   Miller Brothers is considering a project that will produce cash inflows of $32,500, $38,470, $40,805, and $41,268 a year for the next four years, respectively. What is the internal rate of return if the initial cost of the project is $204,600?

Answer 1

3) Year Cash Flow PVF @14% PV PVF @18% PV 0 $ (204.600.00) 1 S (204,600.00) 1 S (204.600.00) 32,500.00 0.877 $ 28,508.77 0.847 S 27,542.37 38,470.00 0.769 S 29,601.42 0.718 $ 27,628.56 40,805.00 0.675 S 27,542.21 0.609 S 24,835.18 41,268.00 0.592 $ 24,433.97 0.516 S 21.285.58 1) Payback Period= 11600+11600 Balance amount = 28000-23200 Balance amount = 4800 Coverd in = 4800 -=0.74 Years 6500 So payback period= 2.74 Years S (94,513.63) $(103,308.31) Now interpollate the situation if Discount rate increase by 4% (from 14% to 18%) NPV will decrease by 197821.94 (94513.63--103308.31)) but we have to decrase NPV at 0 bcz at IRR NPV is 0 2) Average accounting rate of retum= Average annual Income $ 44.150 Average Investment $ 373,000 12% So, 94513.63*4 197821.94 1.46 So IRR is 14+1.46= 15.46 %