Question

PLEASE EXPLAIN STEPS AND SOLUTIONS ( NO EXCEL )

1. Polk Products is considering an investment project with the following cash flows (in 000s):
   

	Year 0	Year 1	Year 2	Year 3
Cashflow	-100	90	90	30

The company has a 10% cost of capital.

1. What is the payback period for the project?
2. What is the discounted payback period for the project?
3. What is the IRR for the project?
4. What is the NPV for the project?
5. What is the MIRR for the project

PLEASE EXPLAIN STEPS AND SOLUTIONS ( NO EXCEL )

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)]

= 1+(10/90)

= 1.11 Years

Answer = 1.11 Years

Note:

Year	Investment	Cash Inflow	Net Cash Flow
0	-100.00	-	-100.00	(Investment + Cash Inflow)
1	-	90.00	-10.000	(Net Cash Flow + Cash Inflow)
2	-	90.00	80.000	(Net Cash Flow + Cash Inflow)
3	-	30.00	110.000	(Net Cash Flow + Cash Inflow)

b.

Discounted Payback Period =

( Last Year with a Negative Cumulative Cash Flow ) + [( Absolute Value of negative Cumulative Cash Flow in that year)/ Total Present Cash Flow in the following year)]

= 1+(18.18/74.38)

= 1.24 Years

Answer = 1.24 Years

Note:

	Cash Flow	Discounting Factor ( 10%)	Present Value (Cash Flow * Discounting Factor)	Cumulative Cash Flow (Present Value of Current Year+ Cumulative Cash Flow of Previous Year)
0	-100	1	-100.00	-100.00
1	90	0.9091	81.82	-18.18
2	90	0.8264	74.38	56.20
3	30	0.7513	22.54	78.74

c.

Let the IRR be x.

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

100 = 90/(1.0x) +90/ (1.0x)^2 +30/(1.0x)^3

Or x= 58.65%

Hence the IRR is 58.65%

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

= [90*1/(1.10)^1+ 90*1/(1.10)^2+30*1/(1.10)^3]-100

= $ 178.7377911344850 -100

= $ 78.74

Answer = $ 78.74

e. Future value of inflows = Present Value*(1+Rate of interest)^Time

= 178.7377911344850*(1+10%)^3

= $ 237.90  

MIRR=[Future value of inflows/Present value of outflow]^(1/n)-1

= [237.90/100]^(1/3)-1

= 33.49%

Answer = 33.49%