Question

2) Project K costs $44,657.75, its expected cash inflows are $10,000 per year for 9 years, and its WACC is 13%. What is the project's IRR?

3) Project K costs $55,000, its expected cash inflows are $8,000 per year for 12 years, and its WACC is 14%. What is the project's payback?

Please show all work & formulas

Answer 1

2

Project K
IRR is the rate at which NPV =0
IRR	0.169
Year	0	1	2	3	4	5	6	7	8	9
Cash flow stream	-44657.8	10000	10000	10000	10000	10000	10000	10000	10000	10000
Discounting factor	1	1.169	1.366561	1.59751	1.8674888	2.183094	2.552037	2.983331	3.487514	4.076904
Discounted cash flows project	-44657.8	8554.32	7317.639	6259.743	5354.7846	4580.654	3918.438	3351.958	2867.372	2452.842
NPV = Sum of discounted cash flows
NPV Project K =	0.000526
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	0.169	=16.9%
Accept project as IRR is more than discount rate

3)

Project K
Year	Cash flow stream	Cumulative cash flow
0	-55000	-55000
1	8000	-47000
2	10000	-37000
3	10000	-27000
4	10000	-17000
5	10000	-7000
6	10000	3000
7	10000	13000
8	10000	23000
9	10000	33000
10	10000	43000
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 5 and 6
therefore by interpolation payback period = 5 + (0-(-7000))/(3000-(-7000))
5.7 Years