Question

1. A project has and initial cost of $52,000, expected net cash inflows of $11,000 per year for 7 years, and a cost of capital of 9%. a. What is the project's NPV? b. What is the project's IRR? c. What is the projects payback period?

Answer 1

	Present Value = Future value/ ((1+r)^t)
	where r is the interest rate that is 9% and t is the time period in years.
	Net present value (NPV) = initial investment + sum of present values of future cash flows.
	Year	0	1	2	3	4	5	6	7
	cash flow	-52000	11000	11000	11000	11000	11000	11000	11000
	present value		10091.74	9258.48	8494.018	7792.677	7149.245	6558.941	6017.377
	NPV	3362.481
a)	The NPV is $3362.481.
	The IRR is the internal rate of return
	Use the financial formulas function in excel to find the IRR
	Year	0	1	2	3	4	5	6	7
	cash flow	-52000	11000	11000	11000	11000	11000	11000	11000
	IRR	10.90%
b)	The internal rate of return(IRR) is 10.90%.
	Year	0	1	2	3	4	5	6	7
	cash flow	-52000	11000	11000	11000	11000	11000	11000	11000
	It takes 4 years to recover 44000
	Remaining amount to be recovered is 52000 - 44000
	Remaining amount to be recovered is 8000.
	11000 is recovered in one year from year 4 to year 5.
	8000 will be recovered in (8000/11000)*1 years
	8000 will be recovered in .72 years.
	Payback period	4.72 years
c)	The payback period is approximately 4 years and 9 months.