Initial Investment = $100,000
Cash Flows, Year 1 to Year 5 = $10,000
Cash Flows, Year 6 to Year 10 = $20,000
Answer a.
Let IRR be i%
NPV = -$100,000 + $10,000/(1+i) + $10,000/(1+i)^2 +
$10,000/(1+i)^3 + $10,000/(1+i)^4 + $10,000/(1+i)^5 +
$20,000/(1+i)^6 + $20,000/(1+i)^7 + $20,000/(1+i)^8 +
$20,000/(1+i)^9 + $20,000/(1+i)^10
0 = -$100,000 + $10,000/(1+i) + $10,000/(1+i)^2 + $10,000/(1+i)^3 +
$10,000/(1+i)^4 + $10,000/(1+i)^5 + $20,000/(1+i)^6 +
$20,000/(1+i)^7 + $20,000/(1+i)^8 + $20,000/(1+i)^9 +
$20,000/(1+i)^10
Using financial calculator, i = 6.90%
Internal Rate of Return = 6.90%
Answer b.
Required Return = 6.00%
Present Value of Cash Inflows = $10,000/1.06 + $10,000/1.06^2 +
$10,000/1.06^3 + $10,000/1.06^4 + $10,000/1.06^5 + $20,000/1.06^6 +
$20,000/1.06^7 + $20,000/1.06^8 + $20,000/1.06^9 +
$20,000/1.06^10
Present Value of Cash Inflows =
$105,078.10
Net Present Value = Present Value of Cash Inflows - Initial
Investment
Net Present Value = $105,078.10 - $100,000
Net Present Value = $5,078.10
Answer c.
Profitability Index = Present Value of Cash Inflows / Initial
Investment
Profitability Index = $105,078.10 / $100,000
Profitability Index = 1.05
Answer d.
Company will recoup initial investment of $90,000 in first seven years and remaining $10,000 in 8th year.
Payback Period = 7 + $10,000 / $20,000
Payback Period = 7.50 years
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