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17- Project L has a cost of ?$81,000. Its expected net cash inflows are ?$90,000 per...

17- Project L has a cost of ?$81,000. Its expected net cash inflows are ?$90,000 per year for 8 years. What is the? project's payback? period? If the cost of capital is 9?%, what are the? project's net present value? (NPV) ? and what is the profitability index? (PI)? What is the? project's internal rate of return? (IRR)?

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Answer #1

1.payback? period=initial investment/annual cash flows

=(81000/90000)=0.9 years.

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$90000[1-(1.09)^-8]/0.09

=$90000*5.534819115

=$498133.72

2.NPV=Present value of inflows-Present value of outflows

=$498133.72-$81000

=$417133.72(Approx)

3.PI= Present value of inflows/Present value of outflows

=$498133.72/$81000

=6.15(Approx).

4.Let irr be x%
At irr,present value of inflows=present value of outflows.

81000=90000/1.0x+90000/1.0x^2+90000/1.0x^3+..............+90000/1.0x^8

Hence x=irr=110.83%(Approx).

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