Question

Hamstring Inc. is considering a project with the following cash flows:

C₀ C₁ C₂      C₃ C₄

_{$(25,000) $10,000 $12,000 $5,000 $8,000}

_{The company is reluctant to consider projects with paybacks of more than three years. If projects pass the payback screen, they are considered further by means of the NPV and IRR methods. The firm's cost of capital is 9%.}

_{a. What is the project 's payback period? Should the project be considered further?}

_{b. What is the project's NPV ? Does NPV indicate acceptance on a stand-alone basis?}

_{c. Calculate the project's IRR by using an iterative approach. Start with the cost of capital and the NPV calculation from part (b). Does IRR indicate acceptance on a stand-alone basis?}

_{d. What is the project's PI? Does PI indicate acceptance on a stand-alone basis?}

Answer 1