An investment project requires a current investment of $100,000. The project is
ID: 2713084 • Letter: A
Question
An investment project requires a current investment of $100,000. The project is expected to generate annual operating cash inflows of $28,000 for the next 5 years and have a $2,000 cash outflow in year 6. The required return is 12%. Determine the net present value for the project, the IRR, and the payback period, respectively.
Net Present Value:
A. $934,
B. $1,947
C. - $80
D. Cannot be determined
IRR:
A. 11.96%
B. 12.7%
C. 3.6%
D. Cannot be determined
PAYBACK:
A. 3.57 years
B. 2.51 years
C. 4.23 years
D. None of the above
Please show work and/or calculator inputs.
Explanation / Answer
1)Present value of cash flow = (PVAF@ 12%, 5 * cash Inflow + ( PVF@12%,6 * Cash outflow)
= (3.60478 * 28000 ) + (.50663 * -2000)
= 100933.84 - 1013.26
= $ 99920.58
NPV =Present value -Initial investment
= 99920.58 - 100000
= $ - 79.53 (approx 80)
correct option is "C"
2) For IRR ,we will select two rates that give present value one above Initial investment and one below it.
At 12% ,present value =99920.58
At 10 % ,present value = 105013.08
IRR =LDR + [(present value at LDR -Initial investment )(HDR -LDR)/ (present value at LDR -present value at HDR)]
= 10 + [(105013.08 -100000 )(12-10) / (105013.08 - 99920.58)]
= 10 + [ 5013.08 *2 / 5092.5]
= 10 + 1.97
= 11.97 %
correct option is "A" -11.96%
3)
Payback period = Period up to which cummulative cash flow is negative + (cummulative cash flow up to this period /cash flow of next period)
= 3 + ( 16000 / 28000)
= 3 + .57
= 3.57 years
correct option is "A"
year cash flow cummulative cash flow 0 - 100,000 -100,000 1 28000 - 72000 2 28000 - 44000 3 28000 -16000 4 28000Related Questions
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