Project L has a cost of $28,000. Its expected net cash inflows are $40,000 per year...

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)?

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Solutions

Expert Solution

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%

jeff jeffy answered 11 months ago

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