Problem Nowadays Manufacturing is considering an investment proposal with the fo

Question

Problem
Nowadays Manufacturing is considering an investment proposal with the following information:
Cost $900,000
Useful life 8 years (straight-line depreciation)
Annual Cash inflows $200,000 (estimated per year for 8 years)
Residual value $ 60,000
Required rate of return 12%
Answer the following questions concerning this proposal. Show your work.
a. What is the payback period of this project?
b. What is the NPV of this project?
c. Is the IRR greater or less than 12%?
d. Should the project be accepted based on NPV?

Explanation / Answer

a.Pay back period = 4 years + $10,000/$20,000 = 4.5 years

b. NPV = $117,760.95

c.IRR is 15.56% is greater than 12%

d. Project should be accepted because NPV is Positive.

Year Cashflow PVF at 12% PV of cashflow 0 -900000 1 -900000 1 200000 0.893 178571.43 2 200000 0.797 159438.78 3 200000 0.712 142356.05 4 200000 0.636 127103.62 5 200000 0.567 113485.37 6 200000 0.507 101326.22 7 200000 0.452 90469.84 8 200000 0.404 80776.65 Residual value 60000 0.404 24232.99 NPV 117760.95 IRR 15.56%

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