P10–22 Payback, NPV, and IRR Rieger International is attempting to evaluate the

Question

P10–22 Payback, NPV, and IRR Rieger International is attempting to evaluate the feasibility

of investing $95,000 in a piece of equipment that has a 5-year life. The firm has estimated

the cash inflows associated with the proposal as shown in the following table.

The firm has a 12% cost of capital.

Year (t) Cash inflows (CFt)

1 $20,000

2 25,000

3 30,000

4 35,000

5 40,000

a. Calculate the payback period for the proposed investment.

b. Calculate the net present value (NPV) for the proposed investment.

c. Calculate the internal rate of return (IRR), rounded to the nearest whole percent,

for the proposed investment.

d. Evaluate the acceptability of the proposed investment using NPV and IRR. What

recommendation would you make relative to implementation of the project? Why?

Explanation / Answer

      -1,583

A) Payback period = Year 1 (20000)+ Year 2 ( 250000)+ Year 3 (30000) + 20000/35000

= 3.5714 years

B) Net present value = 9081

C) IRR = 12% + 3.4062 i.e 15.4062%

D) Project should be accepted as the NPV is positive

Particulars Year Cash Flow PVF @ 12% PV PVF @ 16% PV Initial investment 0 95000 1 95000 1 95000 Present value of cash inflows 95000 95000 Cash Inflows Cash Inflows 1 20000 0.8929 17858 0.8621 17242 Cash Inflows 2 25000 0.7972 19930 0.7432 18580 Cash Inflows 3 30000 0.7118 21354 0.6407 19221 Cash Inflows 4 35000 0.6355 22242.5 0.5523 19330.5 Cash Inflows 5 40000 0.5674 22696 0.4761 19044 Present value of cash inflows        1,04,081      93,418 Net Present value              9,081

      -1,583

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.