A project cost $910 and has cash flows of $220 for the first three years and $95

Question

A project cost $910 and has cash flows of $220 for the first three years and $95 in each of the projects last five years. What is the payback period of the profect? If the company's cutoff point is 6 years, should the company accept of reject the project?

Rieger International is attempting to evaluate the feasibility of investing $90,000 in a piece of equipment that has a 5-year life. The first estimated the cash inflows associated with the proposal as shown in the following table. The firm has an %20 cost of capital.

Year Cash Flow

1 $25,000

2 $20,000

3 $35,000

4 $30,000

5 $45,000

a. what is the investment's IRR?

b. What is the investment's NPV?

c. Should you accept of reject the project? Why?

Explanation / Answer

1) rate of interest is not given

2)

a) IRR = 18.87 %

use this alculator : http://vindeep.com/Calculators/IRRCalculator.aspx

b)

NPV = -90,000 + 25,000/1.2 + 20,000/1.2^2 + 35,000/1.2^3 + 30,000/1.2^4 + 45,000/1.2^5

NPV = - $ 2471.06

c)

Reject ...because IRR is less than 20 %

and also NPV is negative

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