Question

​(Payback ​period, NPV,​ PI, and IRR calculations​) You are considering a project with an initial cash...

​(Payback ​period, NPV,​ PI, and IRR calculations​) You are considering a project with an initial cash outlay of ​$80,000 and expected free cash flows of ​$26,000 at the end of each year for 6 years. The required rate of return for this project is 7 percent.

a. What is the​ project's payback​ period?

b. What is the​ project's NPV​?

c. What is the​ project's PI​?

d. What is the​ project's IRR​?

a. The​ project's payback period is nothing years.  ​(Round to two decimal​ places.)

b. The​ project's NPV is ​$ .  ​(Round to the nearest​ cent.)

c. The the​ project's PI is .  ​(Round to three decimal​ places.)

d. The​ project's IRR is ​%. ​(Round to two decimal​ places.)

Homework Answers

Answer #1
year cashflow factor Present value of cash flow
1-6 26,000 4.766 123916
Now (80,000) 1 (80,000)
NPV = 43,916

Payback period

year Total flow Cumulative
0 (80,000) (80,000)
1 26,000 (54,000)
2 26,000 (28,000)
3 26,000 (2,000)
4 26,000 24,000
5 26,000 50,000
6 26,000 76,000

Payback period is 3 year + 2,000 / 26,000

= 3 + .076 = 3.076 years

PI = present value of inflows / outflows

= 123,916 / 80,000 = 1.55

IRR

year cash inflows p.v @7 Discounted pv
1 -6 26000 4.766 123916
Intial 80000 1 (80,000)
NPV = 43,916
P.v @ 20%
1 -6 26000 3.3255 86463
intial 80000 1 (80,000)
18,394
P.v @ 24%
1 -6 26000 3.0204 78530.4
intial 80000 1 (80,000)
NPV (1469.6)

IRR = 20% + Npv at 20% / Total diff ) x diff in rate

= 20 + 18394 / (18394 +1470) x (24-20)

= 20 + (18394/19864 ) x 4

= 20 + .9259 x 4

= 20 +3.7036 = 23.70

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