Question

Problem 5-53 (algorithmic) Show WorkQuestion Help Advanced Modular Technology (AMT) makes energy cleaner, safer, more secure and more efficient. It typically exhibits net annual revenues that increase over a fairly long period. In the long run, an AMT project may be profitable as measured by IRR, but its simple payback period may be unacceptable. Evaluate this AMT project using the IRR method when the company MARR is 16% per year and its maximum allowable payback period is two years. What is your recommendation? Capital investment at time 0 Net revenues in year k S110,000 $18,000 $10,000. (k-1) Market (salvage) value Life S9,000 5 years The internal rate of return is% (Round to one decimal place )

Answer 1

MARR = 16%

For IRR, we need to find Net cash flow and use IRR formula in excel

For simple payback period, we do not discount future cash flows. we find Cumulative cash flow (CCF), we need to find the year in which CCF turns positive

Simple payback period = Year bef CCF turns positive + (Absolute value of CCF bef it turns positive/Value of cash flow in the year in which CCF turns positive)

year	investment	Net Revenue	Salvage value	Net Cash Flow	Cumulative Cashflow
0	-110000			-110000	-110000
1		18000		18000	-92000
2		28000		28000	-64000
3		38000		38000	-26000
4		48000		48000	22000
5		58000	9000	67000	89000
			IRR	18.8%

Simple payback period = 3 + 26000/48000 = 3.5416 years

As IRR>MARR but the simple payback period is greater than 2 years, so the project is not acceptable