Winston Clinic is evaluating a project that costs $52,125 and has expected net c

Question

Winston Clinic is evaluating a project that costs $52,125 and has expected net cash inflows of $12,000 per year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of capital of 12 percent.

            A. What is the project’s payback?

                   Payback Period = Investment / Constant Annual Cash Flow

                                             = $52,125 / 12,000

                                             = 4.34 years

            B. What is the project’s NPV? It’s IRR? It’s MIRR?

****Can you please NOT use excel. I need to see step by step how you calculate the answers to B.*******

Explanation / Answer

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project. Step 1 :-Cashflows are as given in question for each year Step 2:-Discounted cashflows using (Cashflow)/(1+discount rate)^(period) Discount rate is 12% and period from 1 year to 8 year Step 3:-Sum all the values from year 0 to year 8 you will get 7486.68 which is NPV of project. Discount rate 12% Year 0 1 2 3 4 5 6 7 8 Cashflows -52125 12000 12000 12000 12000 12000 12000 12000 12000 DCF@12% -52125 10714.29 9566.33 8541.36 7626.22 6809.12 6079.57 5428.19 4846.60 NPV 7486.68 Yes-Accept the project as NPV is positive Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero Step 1 :-Cashflows are as given in question for each year Step 2:-Use trial and error to arrive at discount rate which will make NPV as 0 Discount rate 16.00% Year 0 1 2 3 4 5 6 7 8 Cashflows -52125 12000 12000 12000 12000 12000 12000 12000 12000 DCF@IRR -52125 10344.9168 8918.10858 7688.091 6627.722 5713.602 4925.562 4246.211 3660.558 NPV -0.22924077 IRR 15.999% Accept the project as IRR is positive While the internal rate of return (IRR) assumes the cash flows from a project are reinvested at the IRR, the modified IRR assumes that positive cash flows are reinvested at the firm's cost of capital, and the initial outlays are financed at the firm's financing cost. Therefore, MIRR more accurately reflects the cost and profitability of a project. MIRR = 8TH ROOT OF(Future value of cashflows till 8th yeaar / initial cash outflow) -1 Future value is equal cashflow *( 1+ discount rate)^ period Step 1 :-Cashflows are as given in question for each year Step 2:-COMPOUND cashflows using (Cashflow)*(1+discount rate)^(7) FOR YEAR 1;(Cashflow)*(1+discount rate)^(6) FOR YEAR 2 and so on..till year 7,for year 8 it is 12000. FV is sum of all CF from year 1 to 8 Step 3:-MIRR = 8TH ROOT OF(Future value of cashflows till 8th yeaar / initial cash outflow) -1 Discount rate 12% Year 0 1 2 3 4 5 6 7 8 Cashflows -52125 12000 12000 12000 12000 12000 12000 12000 12000 DCF@12% -52125 26528.18 23685.87 21148.10 18882.23 16859.14 15052.80 13440.00 12000.00 FV is sum of all CF from year 1 to 8 147596.32 PV of initial CF 52125.00 MIRR 13.8947% Accept the project

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