Question

ABC company typically exhibits increasing net annual revenues over time. In the long run, an ABC...

ABC company typically exhibits increasing net annual revenues over time. In the long run, an ABC project may be profitable as measured by IRR, but its simple payback period may be unacceptable. Evaluate this ABC project using the IRR method when the company’s MARR is x1% per year. If the company’s maximum allowable payback period is three years. What is your recommendation?

Capital Investment at time 0: $100,000

Net revenue in year k :$20,000+$10,000×(k-1)

Market (Salvage) value: $X2

Useful life: 5 years

x1=25%

x2=0

Homework Answers

Answer #1

Pls see table below for calculations and answer.

Time Investment Salvage Revenue Net CF Cumulative Net CF
0 -100000 -100000 -100000
1 20000 20000 -80000
2 30000 30000 -50000
3 40000 40000 -10000
4 50000 50000 40000
5 0 60000 60000 100000
IRR 23.3%

This project fails both IRR (23.3% which is lower than MARR of 25%) and payback period (which is longer than 3 years, as it is between years 3 and 4 that the cumulative net CF turns from negative to positive)

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