Question

Please answer both parts of the question.

Ivanhoe Specialties just purchased inventory-management computer software at a cost of $1,684,950. Cost savings from the investment over the next six years will produce the following cash flow stream: $251,340, $221,240, $455,600, $493,250, $745,320, and $553,740. What is the payback period on this investment? (Round answer to 2 decimal places,e.g. 15.25.)

Management of Brian Lee, a confectioner, is considering purchasing a new jelly bean-making machine at a cost of $322,032. They project that the cash flows from this investment will be $93,040 for the next seven years. If the appropriate discount rate is 14 percent, what is the IRR that Brian Lee management can expect on this project? (Do not round discount factors. Round other intermediate calculations to 0 decimal places e.g. 15 and final answer to 2 decimal places, e.g. 5.25%.)

Answer 1

Inv
Year	Cash flow stream	Cumulative cash flow
0	-1684950	-1684950
1	251340	-1433610
2	221240	-1212370
3	455600	-756770
4	493250	-263520
5	745320	481800
6	553740	1035540
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 4 and 5
therefore by interpolation payback period = 4 + (0-(-263520))/(481800-(-263520))
4.35 Years

Inv
IRR is the rate at which NPV =0
IRR	0.214999446
Year	0	1	2	3	4	5	6	7
Cash flow stream	-322032	93040	93040	93040	93040	93040	93040	93040
Discounting factor	1	1.214999	1.476224	1.793611	2.1792363	2.647771	3.21704	3.908702
Discounted cash flows project	-322032	76576.17	63025.68	51873.01	42693.856	35138.99	28920.99	23803.3
NPV = Sum of discounted cash flows
NPV Inv =	1.29588E-06
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	21.50%