Primus Corp. is planning to convert an existing warehouse into a new plant that

Question

Primus Corp. is planning to convert an existing warehouse into a new plant that will increase its production capacity by 45 percent. The cost of this project will be $7,528,626. It will result in additional cash flows of $1,922,999 for the next eight years. The discount rate is 13.72 percent.

a. What is the payback period? (Round answer to 2 decimal places, e.g. 15.25)

b. What is the NPV for this project? (Round answer to 2 decimal places, e.g. 15.25)

c. What is the IRR? (Round answer to 2 decimal places, e.g. 15.25%.)

Explanation / Answer

a)

amount paid back after 3 years is 3 * 1922999 = 5768997

amount left = 7528626 - 5768997 = 1759629

payback period = 3 + 1759629 / 1922999 = 3.92 years

b)

NPV is -7528626 + 1922999/1.1372 + ... + 1922999/1.1372^8 = 1476335.51

c)

Let Irr be i

let, i + 1 = x

then

-7528626 + 1922999 / x + ... + 1922999 / x^8 = 0

using trial and error x = 1.1933 and hence IRR is 0.1933 = 19.33%

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