Question

Braun Industries is considering an investment project which has the following cash flows: Year Cash Flow 0 -$1,000 1 400 2 300 3 500 4 400 The company's WACC is 10 percent. What is the project's payback, internal rate of return, and net present value? Select one: a. Payback = 2.6, IRR = 21.22%, NPV = $300. b. Payback = 2.6, IRR = 21.22%, NPV = $260. c. Payback = 2.4, IRR = 10.00%, NPV = $600. d. Payback = 2.6, IRR = 24.12%, NPV = $300 e. Payback = 2.4, IRR = 21.22%, NPV = $260.

Answer #1

Year | Cash flows | Cumulative Cash flows |

0 | (1000) | (1000) |

1 | 400 | (600) |

2 | 300 | (300) |

3 | 500 | 200 |

4 | 400 | 600 |

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

2+(300/500)

=2.6 years

Let irr be x%

At irr,present value of inflows=present value of outflows.

1000=400/1.0x+300/1.0x^2+500/1.0x^3+400/1.0x^4

Hence x=irr=21.22%(Approx)

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=400/1.1+300/1.1^2+500/1.1^3+400/1.1^4

=$1260.43

NPV=Present value of inflows-Present value of outflows

=$1260.43-$1000

=$260(Approx).

Hence the correct option is **B.**

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