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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 S270,000 -- --Net operating cash inflows -- S100,000 S100,000 (a) Determine the proposal's payback period
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 S270,000 -- --Net operating cash inflows -- S100,000 S100,000
(a) Determine the proposal's payback period. years (Round answer to one decimal place.)
(b) Determine the proposal's internal rate of return. (Refer to Appendix 128 if you use the table approach.) Round answer to the nearest percentage (ex: 0.18567 = 19%)
(c) Given the amount of the initial investment, determine the minimum annual net cash inflows required to obtain an internal rate of return of 8 percent. Round the answer to the nearest dollar.
Expert Solution
(a) Computation of Proposal's Payback Period:
Payback period = Initial investment/Annual cash inflows
= 270000/100000
= 2.7 Years
(b) Computation of Proposal's Internal Rate of Return:
Initial investment = Annual cash inflows*PVIFA(rate,nper)
270000 = 100000*PVIFA(rate,4)
PVIFA(rate,4) = 270000/100000
PVIFA (rate,4) = 2.7
Using Table of PV we find
Internal Rate of Return (IRR) = 17.81%
(c) Computation of Minimum Annual Net Cash Inflows required to obtain an internal rate of return of 8 percent:
Minimum annual net cash inflows = Initial investment/PVIFA(rate,nper)
= 270000/PVIFA(8%,4)
= 270000/3.31213
Minimum annual net cash inflows = $81,518.62 or $81,519
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