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 proposa Time 0 Year 1 Year 2 Year 3 Year 4 Initial investment Net operating cash inflows $270,000 $100,000 $100,000 $100,000 $100,000 (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

Answer a.

Initial Investment = $270,000
Annual Cash Inflows = $100,000

Payback Period = Initial Investment / Annual Cash Inflows
Payback Period = $270,000 / $100,000
Payback Period = 2.70 years

Answer b.

Initial Investment = $270,000
Annual Cash Inflows = $100,000
Life of Project = 4 years

IRR factor = Initial Investment / Annual Cash Inflows
IRR factor = $270,000 / $100,000
IRR factor = 2.7000

Using Appendix 12B, under n = 4, IRR = 18%

Answer c.

Initial Investment = $270,000
IRR = 10%
Period of Project = 4 years

Minimum Annual Net Cash Flow = Initial Investment / PVA of $1 (10%, 4)
Minimum Annual Net Cash Flow = $270,000 / 3.1699
Minimum Annual Net Cash Flow = $85,176

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.