1. Suppose Palmer Properties is considering investing $3.6 million today (i.e.,

Question

1. Suppose Palmer Properties is considering investing $3.6 million today (i.e., C0 =             -3,600,000) on a new project that is expected to last for 9 years. The project is expected to generate annual cash flows of C1 = -200,000; C2 = 400,000, C3 = 600,000 and then $900,000 for period C4 through C9. If the discount rate is 8% and management’s payback period cutoff is 7 years:

            (a) What is the payback period for the project? Show your work

            (b) What is the net present value of the project ? Show your work

(c) What is the internal rate of return on the project ? Show your work

(d) Under which method(s) above should the company accept the project         (applying the acceptance rules)? Explain

Excel if possible. THANK YOU!

Explanation / Answer

1) Paybak period for a project Year Cash Flow ( in $) Cmmulative Cash flow 0 -3600000 -3600000 1 -200000 -3800000 2 400000 -3400000 3 600000 -2800000 4 900000 -1900000 5 900000 -1000000 6 900000 -100000 7 900000 800000 8 900000 1700000 9 900000 2600000 Payback Period=6+(100000/900000) 6.11Years Calculation of NPV of a project Year Cash Flow ( in $) PVAF *% Net cash flow(in $) 0 -3600000 0.9259 -3333333 1 -200000 0.8573 -171468 2 400000 0.7938 317532.9 3 600000 0.7350 441017.9 4 900000 0.6806 612524.9 5 900000 0.6302 567152.7 6 900000 0.5835 525141.4 7 900000 0.5403 486242 8 900000 0.5002 450224.1 9 900000 0.4632 416874.1 NPV 311908.8

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