Question

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

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)