a. Why is it difficult to calculate the payback period for this project? IRR? ne

Question

a. Why is it difficult to calculate the payback period for this project? IRR? net present value at each of the following discount rates: 0% 5% 10% 15% 20% 25% 30%, 35% r des you answer to part bety tsat st of capital e 5%, what" e oost of capital is 15%? ike this, how should a firm decide whether to invest in the project or reject ir? a. Why is it ditiouit to caiculate the payback period for this project? (Select the best answer below) A. The short life of te project makes zdimait tocompute the payback period. O B. Thesollating cash flows make it dificult to oompute the payback period. O C. It is unreal for a project to have a cash infow as an initial Data Table (Click on the icon copy its contents into a spreadsheet.) O D. The huge amount of cash outflow in year 3 makes the calculation difficult b..f the dscort nte is 0%, te invesements NPV is sl (Round to two doonal places ; If the discount rate-5%, the investments NPV-SLI (Round 50 two decimal places ) If the discount rae is 10%, the investments NWs .(Round to two doornal places.) If the discount nate is 15%, tho investments NPV is S (Rond to two doornal places) Cash flow $1 $1,265,600 $964,160 $274,560 If the discount rate is 20%the investment's NPV is S (Round to two dec mal places.) Print Done

Explanation / Answer

a)

Payback period is the time it will take to return the intital project cash outflow , but since the given project hasa positive cash flow as initital investment which is unreal

hence correct choice is C)

b)

PV = present value or discounted cash flow

NPV = PV of positive cash flows - PV of negative cash flows

=>

NPV at 0%

= 160000 - 736000 + 1265600 - 964100 + 274500

= 0

NPV at 5%

= 160000 - 736000/(1+5%)^1 + 1265600/(1+5%)^2 - 964100/(1+5%)^3 + 274500/(1+5%)^4

= -9.87

NPV at 10%

= 160000 - 736000/(1+10%)^1 + 1265600/(1+10%)^2 - 964100/(1+10%)^3 + 274500/(1+10%)^4

= 4.10

NPV at 15%

= 160000 - 736000/(1+15%)^1 + 1265600/(1+15%)^2 - 964100/(1+15%)^3 + 274500/(1+15%)^4

= 10.29

NPV at 20%

= 160000 - 736000/(1+20%)^1 + 1265600/(1+20%)^2 - 964100/(1+20%)^3 + 274500/(1+20%)^4

= 5.79

NPV at 25%

= 160000 - 736000/(1+25%)^1 + 1265600/(1+25%)^2 - 964100/(1+25%)^3 + 274500/(1+25%)^4

= 0

NPV at 30%

= 160000 - 736000/(1+30%)^1 + 1265600/(1+30%)^2 - 964100/(1+30%)^3 + 274500/(1+30%)^4

= 6.30

NPV at 35%

= 160000 - 736000/(1+35%)^1 + 1265600/(1+35%)^2 - 964100/(1+35%)^3 + 274500/(1+35%)^4

= 37.94

c)

IRR is the rate which NPV of the project is zero

IRR = 0%,5%

hence choose A)

d)

at 5% , NPV of project is negative , hence should not invest in the project

at 15%, NPV of project is positive , hence should invest in the project

e)

Its best to use the NPV method since payback period can not be calculated as discussed above and it has multiple IRR which make the decision ambigious . Hence use NPV method

choose B)

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