Question

Winston Clinic is evaluating a project that costs $52,125 and has expected net cash inflows of $12,000 per year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of capital of 12 percent.

a. What is the project’s payback?

b. What is the project’s NPV? Its IRR? Its MIRR?

c. Is the project financially acceptable? Explain your answer.

Answer 1

1	Payback Period = Investment / Constant Annual Cash Flow
	Payback Period = $52,125 / 12,000
Ans	Payback Period in years	4.34
2	NPV calculation
	NPV = present value of cash inflows - present value of cash outflows
	Annuity factor for 8 years @ 12% (from annuity table) (A)	5.74664
	Annual cash inflows (B)	$ 12,000.00
	Present value of cash in flows (C )	$ 68,959.67
	Present value of cash outflows (D)	$ 52,125.00
Ans	NPV (E=C-D)	$ 16,834.67
3	IRR = Rate in IRR will make the NPV 0. Assume rate to be "r"
	IRR = 52,125 = 12,000 / (1+r) + 12,000(1+r) ^ 2.......+12,000(1+r) ^ 8
Ans	IRR = 16%
4	Is the project financially acceptable?	Yes
	The project is financially acceptable as the project has a positive NPV and reasonable period of payback period. In addition, the IRR is greater than the cost of capital (16% greater than 12%) making the project financially acceptable