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QUESTION 3Not completePoints out of 3.00 Not flaggedFlag question Question text Payback Period, IRR, and Minimum Cash Flows The management of Mesquite Limited is currently evaluating the following investment proposal: Time 0 Year 1 Year 2 Year 3 Year 4 Initial investment $ 250,000 -- -- -- -- Net operating cash inflows -- $ 100,000 $ 100,000 $ 100,000 $ 100,000 (a) Determine the proposal's payback period. Answer 0 years (b) Determine the proposal's internal rate of return. (Refer to Appendix 12B if you use the table approach.) Answer 0 % (c) Given the amount of the initial investment, determine the minimum annual net cash inflows required to obtain an internal rate of return of 16 percent. Round the answer to the nearest dollar.

Explanation / Answer

Answer a.

Initial Investment = $250,000
Annual Operating Cash flows = $100,000
Life of Project = 4 years

Payback Period = Initial Investment / Annual Operating Cash flows
Payback Period = $250,000 / $100,000
Payback Period = 2.50 years

So, Payback Period is 2.50 years

Answer b.

Initial Investment = $250,000
Annual Operating Cash flows = $100,000
Life of Project = 4 years

Let IRR be i%

$250,000 = $100,000 * PVA of $1 (i%, 4)
Using Appendix 12B, i = 22%

So, IRR is 22%

Answer c.

Initial Investment = $250,000
IRR = 16%
Life of Project = 4 years

Annual Operating Cash flows = Initial Investment / PVA of $1 (16%, 4)
Annual Operating Cash flows = $250,000 / 2.7982
Annual Operating Cash flows = $89,344

So, annual operating cash flows is $89,344

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