Question

Calculate the net present value, internal rate or return and payback period for an investment project with the following cash flows using a 5 percent cost of capital:

                Year                       0                              1                              2                              3

                Net Cash Flow   -$150,000             $62,000 $62,000 $62,000

Do you recommend the investment?

               

Answer 1

Calculation of payback period
Year	Cash Flow-1	Cumulative cashflows
0	$       (150,000)	$    (150,000)
1	$          62,000	$      (88,000)
2	$          62,000	$      (26,000)
3	$          62,000	$       36,000
	Payback period	2+26000/62000
	Payback period	2.42
Calculation of NPV		5%
Year	Cash Flow-1		PV factor, 1/(1+r)^t	PV-Cash Flow-1
0	$       (150,000)		1.0000	$ (150,000.00)
1	$          62,000		0.9524	$     59,047.62
2	$          62,000		0.9070	$     56,235.83
3	$          62,000		0.8638	$     53,557.93
			NPV	$     18,841.38
Calculation of IRR	11%	12%
Year	Cash flow-1	PV factor, 1/(1+r)^t	PV factor, 1/(1+r)^t	PV@11%	PV@12%
0	$       (150,000)	1.0000	1.0000	$ (150,000.00)	$(150,000.00)
1	$          62,000	0.9009	0.8929	$     55,855.86	$    55,357.14
2	$          62,000	0.8116	0.7972	$     50,320.59	$    49,426.02
3	$          62,000	0.7312	0.7118	$     45,333.87	$    44,130.38
			NPV	$       1,510.31	$    (1,086.46)
		IRR	=Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)
		IRR	'=11%+ (12%-11%)*(1510.31/(1510.31+1086.46)
		IRR	11.58%

Since Payback period is achieved before the project life, NPV is positive and IRR is higher than cost of capital, it is suggested to accept the project.