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An investment project requires a current investment of $100,000. The project is

ID: 2713084 • Letter: A

Question

An investment project requires a current investment of $100,000. The project is expected to generate annual operating cash inflows of $28,000 for the next 5 years and have a $2,000 cash outflow in year 6. The required return is 12%. Determine the net present value for the project, the IRR, and the payback period, respectively.

Net Present Value:

A. $934,

B. $1,947

C. - $80

D. Cannot be determined

IRR:

A. 11.96%

B. 12.7%

C. 3.6%

D. Cannot be determined

PAYBACK:

A. 3.57 years

B. 2.51 years

C. 4.23 years

D. None of the above

Please show work and/or calculator inputs.

Explanation / Answer

1)Present value of cash flow = (PVAF@ 12%, 5 * cash Inflow + ( PVF@12%,6 * Cash outflow)

                                         = (3.60478 * 28000 ) + (.50663 * -2000)

                                         = 100933.84 - 1013.26

                                         = $ 99920.58

NPV =Present value -Initial investment

       = 99920.58 - 100000

      = $ - 79.53 (approx 80)

correct option is "C"

2) For IRR ,we will select two rates that give present value one above Initial investment and one below it.

At 12% ,present value =99920.58

At 10 % ,present value = 105013.08

IRR =LDR + [(present value at LDR -Initial investment )(HDR -LDR)/ (present value at LDR -present value at HDR)]

       = 10 + [(105013.08 -100000 )(12-10) / (105013.08 - 99920.58)]

       = 10 + [ 5013.08 *2 / 5092.5]

       = 10 + 1.97

       = 11.97 %

correct option is "A" -11.96%

3)

Payback period = Period up to which cummulative cash flow is negative + (cummulative cash flow up to this period /cash flow of next period)

                     = 3 + ( 16000 / 28000)

                     = 3 + .57

                     = 3.57 years

correct option is "A"

year cash flow cummulative cash flow 0 - 100,000 -100,000 1 28000 - 72000 2 28000 - 44000 3 28000 -16000 4 28000
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