Question

Rieger International is attempting to evaluate the feasibility of investing $93,000 in a piece of equipment that has a 5​-year life. The firm has estimated the cash inflows associated with the proposal as: The firm has a 12% cost of capital.

1   $30,000
2   $25,000
3   $30,000
4   $35,000
5   $35,000

a.  Calculate the payback period for the proposed investment in years and months

b.  Calculate the net present value​ (NPV) for the proposed investment.

c.  Calculate the internal rate of return ​(IRR)​, rounded to the nearest whole​ percent, for the proposed investment.

d.  Evaluate the acceptability of the proposed investment using NPV and IRR. What recommendation would you make relative to implementation of the​ project

Answer 1

		Present Value(PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=discount rate=Cost of Capital =12%=0.12
		N=Year   of Cash Flow
		CASH FLOW ANALYSIS OF EXPANSION PROJECT
	N	Year	0	1	2	3	4	5
	A	Total initial cash flow	-$93,000.00
	B	Annual Cash In Flow		$30,000	$25,000	$30,000	$35,000	$35,000
	C=A+B	Net Cash Flow	($93,000)	$30,000	$25,000	$30,000	$35,000	$35,000
		Cumulative Cash Flow	($93,000)	($63,000)	($38,000)	($8,000)	$27,000	$62,000	SUM
	PV=C/(1.12^N)	Present Value of Net Cash Flow	($93,000)	$26,786	$19,930	$21,353	$22,243	$19,860	$17,172
b	NPV=Sum of PV	Net Present Value(NPV)	$17,172
	a	Payback Period =Period at which Cumulative cash flow=NIL
		Payback Period =3+(8000/35000)	3.23	Years
		Payback Period=3 years 2.74 months
	c	Internal Rate of Return	19%	(Using IRR function of excel over the Net Cash Flow)
	d	NPV is positive
		IRR is greater than Cost of Capital
		Hence the investment is acceptable in both criterion