Bill plans to open a do-it-yourself dog bathing center in a storefront. The bath

Question

Bill plans to open a do-it-yourself dog bathing center in a storefront. The bathing equipment will cost $160,000. Bill expects the after-tax cash inflows to be $40,000 annually for 7 years, after which he plans to scrap the equipment and retire to the beaches of Jamaica. 26. What is the project's payback period? A) 1.5 years B) 2.0 years C) 3.3 years D) 4.0 years E) 4.3 years 27. Should you accept the project if your acceptable payoff period is five years? A) Yes B) No 28. Assume the required return is 10%. What is the project's NPV? A) $14,111 B) $27,322 C) $32,556 D) $34,737 E) $45,001 29. Assume the required return is 17%. What is the project's IRR? Should it be accepted? A) 12.2%; yes B) 12.2%; no C) 16.3%; yes D) 16.3%; no E) 17.0%; indifferent 30. Assume the required return is 15%. What is the project's PI? Should it be accepted? A) 0.88; yes B) 0.88; no C) 1.00; indifferent D) 1.04; yes E) 1.04; no

Explanation / Answer

1) Payback period = 4 years because cash inflow in 4 years = 4 * 40000 = 160000 which is equal to the initial investment outlay

2) Accept project as payback period is less than acceptable payback period

3)

4)

IRR is rate of return when NPV = 0

IRR is 16.3% and project should not be accepted as it is less than 17 % required rate

5) PI = (sum of discounted future cash flows)/ initial investment outlay

PI = 166416.8/160000 = 1.04; accept the project as PI is >1

Required rate 10.000% Year 0 1 2 3 4 5 6 7 Cash flow stream -160000 40000 40000 40000 40000 40000 40000 40000 Discounting factor 1 1.1 1.21 1.331 1.4641 1.61051 1.771561 1.948717 Discounted cash flows project -160000 36363.64 33057.85 30052.59 27320.54 24836.85 22578.96 20526.32 NPV = Sum of discounted cash flows NPV A = 34736.75 Discounting factor = (1 + Required rate)^(CORRESPONDING PERIOD IN YEARS) Discounted Cashflow= Cash flow stream/discounting factor

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