Question

1. What is the Payback period of a project with cash flows of -350,000 in year 0, then 100,000 each in years 1, 2 & 3, then 250,000 in year 4? Assume the cost of capital is 10%.

   		2.0 years
   		2.75 years
   		3.2 years
   		can't tell from information given

1. Consider the project in the previous question, what is its IRR?

   		5.56%
   		9.83%
   		14.1%
   		17.54%

Answer 1

Ans Payback = 3.2 years

Year	Cash Flow	Cumulative Cash Flow
0	-350000	-350000
1	100000	-250000
2	100000	-150000
3	100000	-50000
4	250000	200000
TOTAL	200000
Payback Period =	3 years + 50000/250000
	3.20 YEARS

Ans IRR = 17.54%

Year	Project Cash Flows (i)	DF@ 10%	DF@ 10% (ii)	PV of Project ( (i) * (ii) )	DF@ 20% (iii)	PV of Project ( (i) * (iii) )
0	-350000	1	1	(3,50,000)	1	(3,50,000)
1	100000	1/((1+10%)^1)	0.909091	90,909	0.833	83,333
2	100000	1/((1+10%)^2)	0.826446	82,645	0.694	69,444
3	100000	1/((1+10%)^3)	0.751315	75,131	0.579	57,870
4	250000	1/((1+10%)^4)	0.683013	1,70,753	0.482	1,20,563
		NPV	69,439	NPV	(18,789)
	IRR =	Ra + NPVa / (NPVa - NPVb) * (Rb - Ra)
		10% + 69439 / (69439 + 18789)*10%
		17.54%