Advanced Modular Technology (AMT) typically exhibits net annual revenues that in

Question

Advanced Modular Technology (AMT) 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 13% per year and its maximum allowable payback period is five years. What is your recommendation? $95,000 $19,000 $9,000 . (k-1) $9,000 7 years Capital investment at time O Net revenues in year k Market (salvage) value The internal rate of return is 33.1 %. (Round to one decimal place.) The simple payback period isyears. (Round to the nearest whole number.)

Explanation / Answer

Value of IRR is found out using Excel IRR function as follows.

Simple payback period (PBP) is the time by when cumulative cash flows equal zero. From above table, PBP lies between years 3 & 4.

PBP = 3 + (Absolute value of cumulative cash flows in year 3 / Cash flows in year 4)

= 3 + (11,000 / 46,000) = 3 + .24 = 3.4 years

~ 3 years

Year (k) Cash flow ($) Cumulative Cash Flow ($) 0 -95,000 -95,000 1 19,000 -76,000 2 28,000 -48,000 3 37,000 -11,000 4 46,000 35,000 5 55,000 90,000 6 64,000 1,54,000 7 82,000 2,36,000 IRR = 33.5%

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