Question

Project L has a cost of $28,000. Its expected net cash inflows are $40,000 per year for 8 years. What is the project's payback period? If the cost of capital is 8%, what are the project's net present value (NPV) and profitability index (PI)? What is the project's internal rate of return? (IRR)?

This is the correct figures shown in the homework question! Please help!!

Answer 1

Cost of Project = $28,000
Expected Net Cash Inflows = $40,000
Life of Project = 8 years

Answer a.

Payback Period = Cost of Project / Expected Net Cash Inflows
Payback Period = $28,000 / $40,000
Payback Period = 0.70 years

Answer b.

Cost of Capital = 8%

Present Value of Cash Inflows = $40,000 * PVIFA(8%, 8)
Present Value of Cash Inflows = $40,000 * (1 - (1/1.08)^8) / 0.08
Present Value of Cash Inflows = $40,000 * 5.746639
Present Value of Cash Inflows = $229,865.56

Net Present Value = Present Value of Cash Inflows - Cost of Project
Net Present Value = $229,865.56 - $28,000
Net Present Value = $201,865.56

Answer c.

Profitability Index = Present Value of Cash Inflows / Cost of Project
Profitability Index = $229,865.56 / $28,000
Profitability Index = 8.21

Answer d.

Let IRR be i%

NPV = -$28,000 + $40,000 * PVIFA(i%, 8)
0 = -$28,000 + $40,000 * PVIFA(i%, 8)

Using financial calculator:
N = 8
PV = -28000
PMT = 40000
FV = 0

I = 142.74%

IRR of the project is 142.74%