Question

Payback, NPV, and IRR   Rieger International is evaluating the feasibility of investing

​$86 comma 00086,000

in a piece of equipment that has a

55​-year

life. The firm has estimated the cash inflows associated with the proposal as shown in the following​ table:

LOADING...

.

The firm has a

99​%

cost of capital.

a.  Calculate the payback period for the proposed investment.

b.  Calculate the net present value​ (NPV) for the proposed investment.

c.  Calculate the internal rate of return

​(IRR)​,

rounded to the nearest whole​ percent, for the proposed investment.

d.  Evaluate the acceptability of the proposed investment using NPV and IRR. What recommendation would you make relative to implementation of the​ project?

Questions are:

The payback period of the proposed investment is ___ years

The NPV of the proposed investment is

​The IRR of the proposed investment is

Should Rieger International accept or reject the proposed​ investment?

Year ​(t​)	Cash inflows​ (CF)	Copy to Clipboard + Open in Excel +
1	​$20 comma 00020,000
2	​$30 comma 00030,000
3	​$35 comma 00035,000
4	​$20 comma 00020,000
5	​$20 comma 00020,000

Answer 1

a.Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year

                            = 3 years + ($86,000 - $85,000)/ $20,000

                              = 3 years + $1,000/ $20,000

                              = 3 years + 0.05

                              = 3.005 years.

b.Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$86,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 9%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $11,792.58.

c.Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$86,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 14.24%.

d.I would accept the project using the NPV decision rule since the project generates a positive net present value.

I would accept the project using the IRR decision rule since the internal rate of return of the project is higher than the cost of capital.

I would recommend accepting the project using the since the project generates a positive net present value.

In case of any query, kindly comment on the solution