Ivanhoe Corp. management is planning to convert an existing warehouse into a new plant that will...

Ivanhoe Corp. management is planning to convert an existing warehouse into a new plant that will increase its production capacity by 45 percent. The cost of this project will be $7,676,401. It will result in additional cash flows of $2,225,200 for the next eight years. The discount rate is 11.80 percent.

What is the payback period? (Round answer to 2 decimal places, e.g. 15.25)

What is the NPV for this project?

What is the IRR?

Expert Solution

Year	Cash flow stream	Cumulative cash flow
0	-7676401	-7676401
1	2225200	-5451201
2	2225200	-3226001
3	2225200	-1000801
4	2225200	1224399
5	2225200	3449599
6	2225200	5674799
7	2225200	7899999
8	2225200	10125199

Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
therefore by interpolation payback period = 3 + (0-(-1000801))/(1224399-(-1000801))
3.45 Years

Discount rate	11.800%
Year	0	1	2	3	4	5	6	7	8
Cash flow stream	-7676401	2225200	2225200	2225200	2225200	2225200	2225200	2225200	2225200
Discounting factor	1.000	1.118	1.250	1.397	1.562	1.747	1.953	2.183	2.441
Discounted cash flows project	-7676401.000	1990339.893	1780268.240	1592368.730	1424301.190	1273972.442	1139510.234	1019239.923	911663.616
NPV = Sum of discounted cash flows
NPV Project =	3455263.27
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Project
IRR is the rate at which NPV =0
IRR	23.70%
Year	0	1	2	3	4	5	6	7	8
Cash flow stream	-7676401.000	2225200.000	2225200.000	2225200.000	2225200.000	2225200.000	2225200.000	2225200.000	2225200.000
Discounting factor	1.000	1.237	1.530	1.893	2.341	2.896	3.583	4.432	5.482
Discounted cash flows project	-7676401.000	1798868.211	1454218.426	1175600.979	950364.565	768281.775	621084.695	502089.481	405892.867
NPV = Sum of discounted cash flows
NPV Project =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

IRR=	23.70%

jeff jeffy answered 1 year ago

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