Question

Use the data below to answer questions 24-26.

Initial Investment Required	$600,000
Est. Cash Salvage Value	$50,000
Est. Annual Cash Inflows	$400,000
Est. Annual Cash Outflows	$240,000
Discount Rate	15.0%
Company A Useful Life	6 Yrs

24. The net present value is:

   a. -$15.639                c. $27,134

   b. $21,669                d. None

25. The internal rate of return is:

   a. 16.61%            c. 21.78%

   b. 24.33%            d. None

26. The payback period is:

   a. 3.75 Years        c. 6.50 Years

   b. 5.00 Years        d. None

Answer 1

24.

Particulars		PVAF( 15%,6 yrs)	Present Value
Estimated Cash inflows	400000
Estimated Cash outflows	240000
Net cash inflow	160000	3.7845	605518	A
Present value of Salvage value	50000	0.4323	21616	B
Present value of cash inflows (A+B)			627134
Less: Cost of investment(cash outflow)			600000
Net present value			27134

Therefore the option is C, $27134.

25. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. NPV is $27134 @ 15%. For NPV to become zero, IRR will be somewhere around 15%-16%. Using trail and error method, IRR is calculated as follows:

Year	Net cash inflows	PVF @ 15%	PV of Cash inflow	Net cash inflows	PVF @ 16%	PV of Cash inflow
1	160000	0.8695	139120	160000	0.862	137920
2	160000	0.7561	120976	160000	0.7431	118896
3	160000	0.6575	105200	160000	0.6406	102496
4	160000	0.5717	91472	160000	0.5522	88352
5	160000	0.4971	79536	160000	0.4761	76176
6	160000	0.4323	69168	160000	0.4104	65664
			605472			589504

IRR = 15% + (605472 - 600000) / (605472 - 589504) x (16% - 15%)

= 15% + ( 5472 / 15968 ) x 1%

= 15.3439%. Hence option is D, NONE

26.

Pay back period = Initial Investment / Net annual cash inflow

= 600000 / (400000-240000)

= 600000 / 160000

= 3. 75 years. Therefore the option is A.