Question

1) Project K costs $49,525.34, its expected cash inflows are $10,000 per year for 10 years, and its WACC is 13%. What is the project's IRR?

2) Project K costs $60,000, its expected cash inflows are $14,000 per year for 7 years, and its WACC is 10%. What is the project's payback?

3) Project K costs $45,000, its expected cash inflows are $11,000 per year for 8 years, and its WACC is 8%. What is the project's discounted payback?

4) Project K costs $75,000, its expected cash inflows are $15,000 per year for 9 years, and its WACC is 13%. What is the project's NPV?

Answer 1

For the calculation of IRR and payback period, WACC is irrelevant and hence we will not use it while answering questioning 1 and 2. However we wiill use it for answering question 3 and 4.

For calculation of IRR, we will use IRR function in MS-Excel.

For question 3, we will find out present value of cash flows by discounting them at WACC.

Also for calculation of payback period in question 2 and 3, we will use cumulative cash flows. Payback period is the period in which the investment is recovered. Hence we will calculate it by adding: 1) The year before which cumulative cash flows turn positive 2) Fractional period calculated as amount yet to be recovered divded by cash flow during the year in which cumulative cash flows turn positive.

The solutions are as follows. I am also attaching the screenshot of excel formulae for ease of understanding.

Happy Learning!