Question

Payback Period, IRR, and Minimum Cash Flows

The management of Mohawk Limited is currently evaluating the following investment proposal:

	Time 0	Year 1	Year 2	Year 3	Year 4
Initial investment	$ 150,000	--	--	--	--
Net operating
cash inflows	--	$ 50,000	$ 50,000	$ 50,000	$ 50,000

(a) Determine the proposal's payback period.
      _____ years

(b) Determine the proposal's internal rate of return. (Refer to Appendix 12B if you use the table approach.)
Round answer to the nearest percentage (ex: 0.18567 = 19%)
      _____ %

(c) Given the amount of the initial investment, determine the minimum annual net cash inflows required to obtain an internal rate of return of 16 percent. Round the answer to the nearest dollar.
     $ _____

Answer 1

(a)
Payback Period = Investment / Annual Cash inflows
= $150000 / $50000 = 3 years

(b)
For IRR, NPV = 0,
Lets assume Rate = 12%
NPV = $50000 x 3.0374 - $150000 = $1870

Lets assume rate = 13%
NPV = $50000 x 2.9747 - $150000 = ($1265)

IRR = 12% + $1870 / (1870+1265) = 12.59% or 13%

(c)
PV annuity factor @16% for 4 years =2.7983
Annual Cash flow = $150000/2.7983 = $53604