Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
Payback, NPV, and IRR Rieger International is evaluating the feasibility of investing $86,000 in a piece of equipment that has a 5-year life
Payback, NPV, and IRR Rieger International is evaluating the feasibility of investing $86,000 in a piece of equipment that has a 5-year life. The firm has estimated the cash inflows associated with the proposal as shown in the following table: B. The firm has a 9% cost of capital. a. Calculate the payback period for the proposed investment. b. Calculate the net present value (NPV) for the proposed investment. c. Calculate the internal rate of return (IRR), rounded to the nearest whole percent, for the proposed investment. d. Evaluate the acceptability of the proposed investment using NPV and IRR. What recommendation would you make relative to implementation of the project? a. The payback period of the proposed investment is years. (Round to two decimal places.) 0 Data Table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Year (0) Cash inflows (CF) 1 $35,000 2 $30,000 3 $25,000 4 $20,000 $25,000 Enter your answer in Print Done 3 parts remaining
Expert Solution
a).
Payback period is the period in which the cash inflows will cover the initial investment.
First 2 years cashflows is 35000+30000= 65000. Remaining 86000-65000= 21000 can be achieved in 21000/25000= 0.84 th of third year. So, Payback period= 2.84 Years.
b).
NPV for a time period of n can be calculated using the formula: -C+C1/(1+r)+C2/(1+r)^2+....Cn/(1+r)^n; where C is the initial investment, C1 to Cn are cash inflows and r is the required rate of return
NPV= -86000+35000/1.09+30000/1.09^2+25000/1.09^3+20000/1.09^4+25000/1.09^5
= $21081.87
c).
IRR is the discount rate at which NPV is 0.
Let IRR be r, then -C+C1/(1+r)+C2/(1+r)^2+....Cn/(1+r)^n= 0; where C is initial investment, C1 to Cn are annual cashflows and r is IRR.
-86000+35000/(1+r)+30000/(1+r)^2+25000/(1+r)^3+20000/(1+r)^4+25000/(1+r)^5= 0.
r= 18.93%
d).
Using NPV criteron, Project should be accepted, as the NPV is positive
Using IRR criterion, Project should be accepted, as its IRR is greater than the cost of capital.
Both the evlauation methods are favourable to the acceptance of the project. The poject should be implemented.
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
