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 Payback period = 2+(60000/100000) = 2.6 years b PV factor for internal rate of return = 260000/100000 = 2.6 Internal rate of return = 20% c Minimum annual net cash inflows = 260000/2.798 = 92924

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