Question

This year Franklin Inc. has one project proposed by Marketing team. The project costs $ 400,000, its expected cash inflows are $100,000, $150,000, $250,000, $400,000 in the next four years.

If the company’s WACC 15%:

-What is the project’s NPV? (10%)

-What is the project’s IRR? (5%)

-What is the project’s payback period? (5%)

Answer 1

a.

NPV = $193,458.43

	Discount rate = R =	15.0000%	Present Values (PV)
Year	Cash flows	Discount factor or PV factors = Df = 1/(1+R)^Year	PV of cash flows = Cash flows x Df
0	-$400,000	1.000000	-$400,000.00
1	$100,000	0.869565	$86,956.52
2	$150,000	0.756144	$113,421.55
3	$250,000	0.657516	$164,379.06
4	$400,000	0.571753	$228,701.30
		Total of PV = NPV =	$193,458.43

b.

IRR = 32.27659%

IRR is obtained from trial and error method we have to fix such rate for discount that it forces NPV = 0 or sum of all cash flows equal to zero

	IRR = R =	32.27659%	Present Values (PV)
Year	Cash flows	Discount factor or PV factors = Df = 1/(1+R)^Year	PV of cash flows = Cash flows x Df
0	-$400,000	1.000000	-$400,000.00
1	$100,000	0.755992	$75,599.17
2	$150,000	0.571523	$85,728.51
3	$250,000	0.432067	$108,016.73
4	$400,000	0.326639	$130,655.60
		Total of Present values = NPV =	$0.00

c.

Payback period = 2.60 years

Year	Cash flows	Cumulative cash flow
0	-$400,000	-$400,000.00
1	$100,000	-$300,000.00
2	$150,000	-$150,000.00
3	$250,000	$100,000.00
4	$400,000	$500,000.00

Payback period = A + |B|/C        

A = Last period with a negative cumulative cash flow      

|B| = Absolute value of cumulative cash flow at end of period A

C = Total cash flow during the period after A      

Payback period = 2 + 150000/250000     

Payback period = 2.60 years