Question

(Payback ​period, NPV,​ PI, and IRR calculations​) You are considering a project with an initial cash outlay of ​$85,000 and expected free cash flows of ​$25,000 at the end of each year for 6 years. The required rate of return for this project is 9 percent. a. What is the​ project's payback​ period? b. What is the​ project's NPV​? c. What is the​ project's PI​? d. What is the​ project's IRR​?

Answer 1

a.Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 3 + (10000/25000)

= 3.40 years

Hence the correct answer is 3.40 years

Note:

Year	Investment	Cash Inflow	Net Cash Flow
0	-85,000.00	-	-85,000.00	(Investment + Cash Inflow)
1	-	25,000.00	-60,000.00	(Net Cash Flow + Cash Inflow)
2	-	25,000.00	-35,000.00	(Net Cash Flow + Cash Inflow)
3	-	25,000.00	-10,000.00	(Net Cash Flow + Cash Inflow)
4	-	25,000.00	15,000.00	(Net Cash Flow + Cash Inflow)
5	-	25,000.00	40,000.00	(Net Cash Flow + Cash Inflow)
6	-	25,000.00	65,000.00	(Net Cash Flow + Cash Inflow)

b. NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= [ $ 25,000 * 1/(1.09) ^ 1 +$ 25,000 * 1/(1.09) ^2+$ 25,000 * 1/(1.09) ^3+.......+$ 25,000 * 1/(1.09) ^6] - $ 85,000

= $ 27,147.96

Hence the correct answer is  $ 27,147.96

c. PI = Present Value of Cash Inflows / Present Value of Cash Outflows

= $ 112,147.96 / $ 85,000

= 1.32

Hence the correct answer is 1.32

d. IRR :

Project M

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

85,000 = 25000/(1.0x) +25000/ (1.0x)^2 +25000/(1.0x)^3+ ............+$ 25000/(1.0x)^6      

Or x= 19.114%

Hence the IRR is 19.11%