Question

	Seabreeze Clinic is evaluating a project that costs $148,000 and has expected
	net cash inflows of $45,000 per year for six years. (Round answers to 2 decimal places.)
	The cost of capital is 10%.
a.	What is the project's payback?
b.	What is the project's NPV?
c.	What is the project's IRR?
d.	Should the clinic adopt the project? Explain why or why not.

Answer 1

Initial Investment = $148,000
Annual Net Cash Inflows = $45,000
Life of Project = 6 years
Cost of Capital = 10%

Answer a.

Payback Period = Initial Investment / Annual Net Cash Inflows
Payback Period = $148,000 / $45,000
Payback Period = 3.29 years

Answer b.

Net Present Value = -$148,000 + $45,000/1.10 + $45,000/1.10^2 + $45,000/1.10^3 + $45,000/1.10^4 + $45,000/1.10^5 + $45,000/1.10^6
Net Present Value = -$148,000 + $45,000 * (1 - (1/1.10)^6) / 0.10
Net Present Value = -$148,000 + $45,000 * 4.355261
Net Present Value = $47,986.75

Answer c.

Answer d.

Clinic should adopt this project as its NPV is positive and IRR is higher than cost of capital.