Question

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11%, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively.

Time	0	1	2	3	4	5
Cash flow	-$235,000	$65,800	$84,000	$141,000	$122,000	$81,200

Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

Use Excel and show work when completing.

Answer 1

A949 А 926 Time Cash flow Cumulative cash flow Present value calculation Present value calculation Cumulative present value cash flow 927 -2,35,000.00 -2,35,000.00 -235000 -2,35,000.00 -2,35,000.00 928 65,800.00 -1,69,200.00 =65800/(1+11%)^1 59,279.28 -1,75,720.72 929 84,000.00 -85,200.00 =84000/(1+11%)^2 68,176.28 -1,07,544.44 930 1,41,000.00 55,800.00 =141000/(1+11%)^3 1,03,097.98 -4,446.45 931 1,22,000.00 1,77,800.00 =122000/(1+11%)^4 80,365.18 75,918.73 932 81,200.00 2,59,000.00 =81200/(1+11%)^5 48,188.25 1,24,106.98 933 934 IRR Excel formula =IRR(B927:1932) 935 IRR 28.79% 936 937 NPV Excel formula =NPV(11%,B928:1932)+B927 938 NPV 1,24,106.98 939 940 Payback period calculation =2+(85200/141000) 941 Payback period 2.60 942 943 Discounted payback period calculation =3+(4446.45/80365.18) 944 Payback period 3.06 945 946 This project should be accepted as it's IRR is higher than required rate, NPV is positive and 124,106.98, Its payback and discounted payback periods are 2.60 years and 3.06 years 947 respectively which are below the maximum allowable payback and discounted payback period. 948

Time	Cash flow	Cumulative cash flow	Present value calculation	Present value calculation	Cumulative present value cash flow
0	-2,35,000.00	-2,35,000.00	-235000	-2,35,000.00	-2,35,000.00
1	65,800.00	-1,69,200.00	=65800/(1+11%)^1	59,279.28	-1,75,720.72
2	84,000.00	-85,200.00	=84000/(1+11%)^2	68,176.28	-1,07,544.44
3	1,41,000.00	55,800.00	=141000/(1+11%)^3	1,03,097.98	-4,446.45
4	1,22,000.00	1,77,800.00	=122000/(1+11%)^4	80,365.18	75,918.73
5	81,200.00	2,59,000.00	=81200/(1+11%)^5	48,188.25	1,24,106.98
IRR Excel formula	=IRR(B927:B932)
IRR	28.79%
NPV Excel formula	=NPV(11%,B928:B932)+B927
NPV	1,24,106.98
Payback period calculation	=2+(85200/141000)
Payback period	2.60
Discounted payback period calculation	=3+(4446.45/80365.18)
Payback period	3.06
This project should be accepted as it's IRR is higher than required rate, NPV is positive and 124,106.98, Its payback and discounted payback periods are 2.60 years and 3.06 years respectively which are below the maximum allowable payback and discounted payback period.