Question

I could use some help with the problem below:

A project requires an initial outlay of $50,000,000. The project life is determined to be 5 years at which time it will be discontinued and sold for scrap at $5,000,000. The project will generate net cash in-flows of $20,000,000 every year for the next five years. The projects required rate or discount rat is 11.25%

1. What is the projects Payback period?

2. What is the projects NPV?

3. What is the projects IRR?

Answer 1

1. Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 2 + ( 10000000/20000000)

= 2.50 Years

Hence the correct answer is 2.50 Years

Note:

Year	Investment	Cash Inflow	Net Cash Flow
0	-5,00,00,000	-	-5,00,00,000	(Investment + Cash Inflow)
1	-	2,00,00,000	-3,00,00,000	(Net Cash Flow + Cash Inflow)
2	-	2,00,00,000	-1,00,00,000	(Net Cash Flow + Cash Inflow)
3	-	2,00,00,000	1,00,00,000	(Net Cash Flow + Cash Inflow)
4	-	2,00,00,000	3,00,00,000	(Net Cash Flow + Cash Inflow)
5	-	2,50,00,000	5,50,00,000	(Net Cash Flow + Cash Inflow)

2.

Net Present Value = Present Value of Cash Inflows - Present Value of Cash Outflows

= [ $ 2,00,00,000 * 1/ (1.1125) ^ 1 +$ 2,00,00,000 * 1/ (1.1125) ^2 +$ 2,00,00,000 * 1/ (1.1125) ^3+$ 2,00,00,000 * 1/ (1.1125) ^4+$ 2,50,00,000 * 1/ (1.1125) ^5 ] -$ 5,00,00,000

= $ 26,389,490.75

Hence the correct answer is $ 26,389,490.75

3.

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

5,00,00,000 = 2,00,00,000/(1.0x) +2,00,00,000/ (1.0x)^2 +2,00,00,000/(1.0x)^3+ $ 2,00,00,000/(1.0x)^4 +2,50,00,000/(1.0x)^5

Or x= 30.059%

Hence the IRR is 30.06%