1. A company is evaluating a project with the follow projected cash flow charact
ID: 2380214 • Letter: 1
Question
1. A company is evaluating a project with the follow projected cash flow characteristics. Calculate the NPV, IRR a company requires a return greater than 9% for this project and a payback period of less than 5 years to undertake the company undertake the project? Explain.
Year Annual Payback
Payment Calculation
0 ($75,000)
1 $5,000
2 $25,000
3 $25,000
4 $10,000
5 $50,000
6 $40,000
a. NPV ________
b. IRR________
c. Payback period________
d. Explain________
Explanation / Answer
Hi,
Please find the answer as follows:
Part A:
NPV = -75000 + 5000/(1+.09)^1 + 25000/(1+.09)^2 + 25000/(1+.09)^3 + 10000/(1+.09)^4 + 50000/(1+.09)^5 + 40000/(1+.09)^6 = 33365.26
Part B:
To calculate IRR, you need to the put the value of NPV as 0 and solve for r as follows:
NPV = 0 = -75000 + 5000/(1+r)^1 + 25000/(1+r)^2 + 25000/(1+r)^3 + 10000/(1+r)^4 + 50000/(1+r)^5 + 40000/(1+r)^6
Solving for r, we get IRR as 19.71%
IRR = 19.71%
Part C:
Total Investment of 75000 will get recovered in 5000 (Year 1) + 25000 (Year 2) + 25000 (Year 3) + 10000 (Year 4) and Balance of 10000 (75000 - 65000) between Year 4 and Year 5
Payback Period = 4 + (75000 - 65000)/50000 = 4.2 Years
The company can undertake this project as the payback period is less than 5 Years.
Thanks.
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