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:

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

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

(c) Given the amount of the initial investment, determine the minimum annual net cash inflows required to obtain an internal rate of return of 16 percent. Round the answer to the nearest dollar.
$ Answer

Time 0 Year 1 Year 2 Year 3 Year 4 Initial investment $260,000 -- -- -- -- Net operating cash inflows -- $100,000 $100,000 $100,000 $100,000

Explanation / Answer

a) Calculation of the Payback Period Year Cash Flow Cumulative Cash Flow 0 -260000 -260000 1 100000 -160000 2 100000 -60000 3 100000 40000 4 100000 140000 Payback period = 2+60000/100000 2.6 Payback period = 2.6 Years b IRR NPV at 10% NPV = Cash Inflows- Cash Outflows Cash Inflows = Cash Flow(PVAF, Life, Years) NPV = 100000*PVAF. 4 years , -260000 100000*3.169-260000 316987-260000 $56,987 NPV at 20% NPV = 100000*2.588-260000 258874-260000 ($1,127) IRR = Lower Rate+ NPV at Lower Rate/ NPV at Lower Rate- NPV at Higher Rate ( HR-LR) 10+56987/56987(-1127)(20-10) 10+9.80 19.80% Cash Inflows at 16% 100000*2.7981 $2,798,181

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