Question

Tradition Sports Distribution is considering opening new branches in two locations. Analysis revealed the following resulting yearly cash flows.

Colorado Springs, CO: (700); 100; 300; 650

Bend, OR: (700); 400; 350; 160

1. What is the IRR of each?

2. What is the NPV (12% COC) of each?

3. What is the payback period for each?

Thank you!!!

Answer 1

a.Colarado Springs

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$700. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 17.71%.

Bend

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$700. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 16.74%.

b.Colarado Springs

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$700. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the cost of capital of 12%
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 12% cost of capital is $91.10.

Bend

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$700. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the cost of capital of 12%
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 12% cost of capital is $50.05.

c.Colarado

Payback period=full years until recovery + unrecovered cost at the start of the year/cash flow during the year

                        = 2 years + ($700 - $400)/ $650

                        = 2 years + $300/ $650

                        = 2 years + 0.46

                        = 2.46 years

Bend

Payback period=full years until recovery + unrecovered cost at the start of the year/cash flow during the year

                             = 1 year + ($700 - $400)/ $350

                             = 1 year + $300/ $350

                             = 1 year + 0.86

                             = 1.86 years.

In case of any query, kindly comment on the solution.