question archive Consider an investment that costs $140,500 and has a cash inflow of $44,000 every year for 4 years
Consider an investment that costs $140,500 and has a cash inflow of $44,000 every year for 4 years
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Consider an investment that costs $140,500 and has a cash inflow of $44,000 every year for 4 years. The required return is 8%, and required payback is 3 years. a) What is the payback period, NPV, and IRR? b) Should you accept the project?
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a)
| CASH FLOWS | PV FACTOR @8% | PV OF CASH FLOWS | ||
| YEAR 0 | -140500 | -140500 | ||
| YEAR 1 | 44000 | 0.926 | 40740.74 | |
| YEAR 2 | 44000 | 0.857 | 37722.91 | |
| YEAR 3 | 44000 | 0.794 | 34928.62 | |
| YEAR 4 | 44000 | 0.735 | 32341.31 | |
| ROR | 8.0% | NPV = | 5233.58 | |
| pay back period = | 3.19 years | =NO. OF YEARS TAKEN TO EARN THE COST INCURRED | ||
| IRR = | 9.66% | =IRR(VALUES) |
b)
PAYBACK PERIOD = 3.19 YEARS
REJECT SINCE THE REQUIRED PAY BACK IS 3 YEARS
NPV IS POSITIVE PROJECT SHOULD BE ACCEPTED
IRR IS MORE THAN REQUIRED RATE PROJECT SHOULD BE ACCEPTED
