Question

Part 1. Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively.

Time:	0	1	2	3	4	5
Cash flow:	–$235,000	$65,800	$84,000	$141,000	$122,000	$81,200

Use the NPV decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Part 2.  

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively.

Time:	0	1	2	3	4	5
Cash flow:	–$235,000	$65,800	$84,000	$141,000	$122,000	$81,200

Use the payback decision rule to evaluate this project. (Round your answer to 2 decimal places.)

Part 3.

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively.

Time:	0	1	2	3	4	5
Cash flow:	–$235,000	$65,800	$84,000	$141,000	$122,000	$81,200

Use the IRR decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Answer 1

Part 1	NPV		$   1,24,106.98
	Project should be accepted as it has positive NPV.
Working:
Year	Cash flow	Discount factor	Present Value
a	b	c=1.11^-a	d=b*c
0	$       -2,35,000	1.0000	$ -2,35,000.00
1	$             65,800	0.9009	$       59,279.28
2	$             84,000	0.8116	$       68,176.28
3	$         1,41,000	0.7312	$   1,03,097.98
4	$         1,22,000	0.6587	$       80,365.18
5	$             81,200	0.5935	$       48,188.25
	NPV		$   1,24,106.98
Part 2	Payback Period	2.60 Years
	Project Should be accepted as it is within the payback period.
Working:
Year	Cash flow	Cumulative Cash flow
0	$       -2,35,000	$ -2,35,000
1	$             65,800	$ -1,69,200
2	$             84,000	$     -85,200
3	$         1,41,000	$      55,800
4	$         1,22,000	$   1,77,800
5	$             81,200	$   2,59,000
Payback Period	=	2+(85200/141000)
	=	2.60
Part 3	IRR		28.79%
	Project Should be accepted as IRR is more than required rate of return.
Working:
Year	Cash flow
0	$       -2,35,000
1	$             65,800
2	$             84,000
3	$         1,41,000
4	$         1,22,000
5	$             81,200
IRR	=irr(B38:B43)
	28.79%
Note: B38:B43 is the values of cash flow from year 0 to 5.