Question

You are considering a project with an initial cash outlay of $70,000 and expected free cash flows of $15,500 at the end of each year for 5 years. The required rate of return for this project is 5.5 percent.

a) (5 pts) What is the payback period of the project?

b) (5 pts) What is the project’s NPV?

c) (5 pts) What is the project’s IRR?

d) (5 pts) If your firm has a required payback of 5years and passing the IRR and NPV, would you accept this project? Explain.

Answer 1

a) Paybck Period of the project Formula :

= Initial Investment / Annual Cash Flow

	Y0	Y1	Y2	Y3	Y4	Y5
Intial Investment	-70000
Cash Flow		15,500	15,500	15,500	15,500	15,500

Intial Investment = -70,000

Annual Cash Flow = 15,500

Payback Period of the project = 70,000 / 15,500

= 4.52 Years.

b)

NPV = Cash flow / (1 + i)^t - Initial Investment.

I = 5.5% , T = Number of years

Please see the below table

	Y0	Y1	Y2	Y3	Y4	Y5
Intial Investment	-70000
NPV		14691.94	13926.01	13200.01	12511.86	11859.58
Cash Flow		15,500	15,500	15,500	15,500	15,500

NPV = 66,189.40

Intial Investment = 70,000

NPV = 66,189.40 - 70,000

= - 3810. / - 5.44%

NPV is negative, project gives negative return

c)

IRR = IRR is the rate in which NPV becomes zero, here it is 3%.

Cash Flow	-70000	15,500	15,500	15,500	15,500	15,500
IRR	3%

Based on the excel formula.

D) Based on the NPV, IRR and Payback period project can't be accepted.