Question

Question #1

Consider the following potential investment, which has the same risk as a firm’s other projects:

Time	Cash Flow
0	($400,000)
1	$100,000
2	$108,000
3	$115,000
4	$135,000
5	$145,000

1. What are the investment’s payback period, IRR, and NPV, assuming the firm’s WACC is 11%?

Please show your calculations in Excel. Thanks.

Answer 1

1	Payback period	=	3.57
2	IRR	=	14.36%
3	Net Present Value	=	$        36,811
	Workings:
1	Year	Investment	Net Cash Flow	Cumulative Cash Flow
	1	$   -4,00,000	$     1,00,000	$     -3,00,000
	2		$     1,08,000	$     -1,92,000
	3		$     1,15,000	$         -77,000
	4		$     1,35,000	$           58,000
	5		$     1,45,000
	Payback Period	=	3 years + ($77000 / $135000)
		=	3.57	years
2	Computation of IRR
		Year	Value Flows
		0	$   -4,00,000
		1	$     1,00,000
		2	$     1,08,000
		3	$     1,15,000
		4	$     1,35,000
		5	$     1,45,000
	IRR	=	14.36%
3
		Year	Value Flows	Present Factor @11%	Present Value
	Initial Cost	0	$   -4,00,000	1	$      -4,00,000
	Cash Inflows	1	$     1,00,000	0.90090	$            90,090
		2	$     1,08,000	0.81162	$            87,655
		3	$     1,15,000	0.73119	$            84,087
		4	$     1,35,000	0.65873	$            88,929
		5	$     1,45,000	0.59345	$            86,050
	Net Present Value				$            36,811
	(Note: P.V Factor Values taken up to 5 decimal places)