1. Suppose Palmer Properties is considering investing $3.6 million today (i.e.,
ID: 2763846 • Letter: 1
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 please. Also if you can just write out each excel code for the first one or write out formula to calculate. Thank you!
Explanation / Answer
a)
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 6 and 7
there fore payback period = 6 + (0-(-100000))/(800000-(-100000)) = 6.111years
b)
c)
IRR is the rate of return for which NPV = 0
d. Accept project for NPV and IRR only since NPV is >0 and IRR is greater than discount rate
Year Cash flow stream Cumulative 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 2600000Related Questions
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