Question

1. Project L costs $60,000, its expected cash inflows are $14,000 per year for 6 years, and its WACC is 9%. What is the project's payback? Round your answer to two decimal places.

2. Project L costs $40,955.09, its expected cash inflows are $9,000 per year for 10 years, and its WACC is 13%. What is the project's IRR? Round your answer to two decimal places.

Answer 1

1).

Payback period is the period in which the cash inflows will cover the initial investment

Given that Project L 's initial investment is $60000. and expected cashinflows are $14000 for 6 years.

If the cashinflows are constant each year, payback period can be calculated as: Initial Investment/Annual cashinflow.

So, Payback Period for Project L= 60000/14000= 4.29 Years.

2).

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.

Given Project L costs $40955.09, annual cashinflow= $9000 for 10 years.

So, 0= -40955.09+9000/(1+r)+9000/(1+r)^2+......9000/(1+r)^10

we can use present value of annuity formula for cashinflows which is P*(1-(1+r)^-n)/r

0= 40955.09+(9000*(1-(1+r)^-10)/r)

40955.09= 9000*(1-(1+r)^-10)/r

r= 17.65%

So, Project's IRR is 17.65%