Question

JS company is considering an investment that requires an outlay of $100,000 today. Cash inflow from the investment are expected to be $10,000 for year 1-3, and $30,000 for year 4, 5, 6, 7, and 8. You require a 20% rate of return on this type of investment. Answer the following questions:

1. First draw the timeline and specify the cash outflow and inflow for each period.
2. Calculate the net present value.
3. Calculate the internal rate of return of this investment.
4. Calculate the payback periods
5. Shall the investment be undertaken?

Please report the answer in the following multiple choices.

a	Discount rate	0.20
	year	cash flow
	0	??
	1	??
	2	??
	3	??
	4	??
	5	??
	6	??
	7	??
	8	??
b	pv of cash flow since yr 1	??
	npv	??
c	IRR	??
d	payback period	??
e	yes or no?	??

Answer 1

a	Discount rate	20%
	year		PV of cash flow	Cumulative cash flow
	0	-$100,000		-$100,000
	1	$10,000	$8,333.33	-$90,000
	2	$10,000	$6,944.44	-$80,000
	3	$10,000	$5,787.04	-$70,000
	4	$30,000	$14,467.59	-$40,000
	5	$30,000	$12,056.33	-$10,000
	6	$30,000	$10,046.94	$20,000
	7	$30,000	$8,372.45	$50,000
	8	$30,000	$6,977.04	$80,000
Total			$72,985.16
b	PV of cash flow since yr 1	$72,985.16
	NPV	-$27,014.84
c	IRR	12.23%
d	payback period	5.33
e	yes or no?	no

Payback Period for project = last year of negative cumulative cash flow + (absolute value of last year of negative cumulative cash flow / Cash flow of next year after negative Cumulative Cash Flow)

Projected is not accepted because NPV is negative and IRR is less than discount rate

Formulas used in excel: