Payback Period, IRR, and Minimum Cash Flows The management of Mesquite Limited i

Question

Payback Period, IRR, and Minimum Cash Flows The management of Mesquite Limited is currently evaluating the following investment proposal:

Time 0 Year 1 Year 2         Year 3 Year 4

Initial investment $270,000 --- --- --- ---

Net operating     

cash inflows --- $100,000 $100,000 $100,000 $100,000

Time 0 Year 1 Year 2 Year 3 Year 4 Initial investment $270,000 -- -- -- --

(a) Determine the proposal's payback period. ___________ years

(b) Determine the proposal's internal rate of return. (Refer to Appendix 12B if you use the table approach.) ___________ %

(c) Given the amount of the initial investment, determine the minimum annual net cash inflows required to obtain an internal rate of return of 10 percent. Round the answer to the nearest dollar. $ ___________

Explanation / Answer

a. 2.7 years

b.17.81% p.a.

c.$108,571.0839 P.a.

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