Palmer Inc. has an investment project that has annual cash flows of $8,800, $ 9,

Question

Palmer Inc. has an investment project that has annual cash flows of $8,800, $ 9,000, $10,000, $8,700 and $9,500 in next five years, and a discount rate of 10%.

a)      Find out the IRR, payback period, Discounted Payback period, NPV, and profitability index if the initial cost is $28,000. Should the company consider investing in the project?    

b)      Find out the IRR, payback period, Discounted Payback period, NPV, and profitability index if the initial cost is $35,000. Should the company consider investing in the project?

c)       Complete the following table with information from (a) and (b) and discuss which project you would choose.                                                                                                             

If initial cost is $28,000

If initial cost is $35,000

Payback Period

Discounted Payback

NPV (Net Present Value)

PI (Profitability Index)

IRR

If initial cost is $28,000

If initial cost is $35,000

Payback Period

Discounted Payback

NPV (Net Present Value)

PI (Profitability Index)

IRR

Explanation / Answer

a. IRR=19.01

payback period= 3 year+(28000-27800)/8700)*12=3yr3month

discounted payback=3 year+(28000-22943.2)/(28885.3-22943.2)*12=3yr10 mnth

NPV=6792.13

PI=34784.8/28000=1.24

b.IRR=9.77%

payback period= 3 year+(35000-27800)/36500)*12=3 year 2 mnth

discounted payback=2=cannot recovered

NPV=-207.8658

PI=34784.8/35000=0.99

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