Question

- ABC Corporation is considering a project that provides the following cash flows steam:

Year |
0 |
1 |
2 |
3 |
4 |
5 |

Cash flows |
-$1,000 |
$375 |
$425 |
$250 |
$110 |
$100 |

- If WACC is 10%, what is
**NPV**, and**should the company accept the project**? - Find
**IRR**,**MIRR**,**payback**, and**discounted payback period**.

Answer #1

a. Since WACC is 10%, we use the NPV formula.

NPV = -1000 + 375/1.1 + 425/1.1^2 + 250/1.1^3 + 110/1.1^4 + 100/1.1^5 = 17.201.

Hence, the company should accept the project as NPV is positive.

b. The IRR can be calculated by hit-and-trial or by excel. We use excel and find that IRR = 10.866%.

The MIRR as obtained from excel is = 10.3758%.

The payback period will lie between years 2 and 3. The value will be = 2 + (1000-375-425)/250 = 2.8 years.

The discounted payback will be calculated accroding to each discounted cash flow:

-1000, 375/1.1 = 340.91, 425/1.1^2 = 351.24, 250/1.1^3 = 187.8287, 110/1.1^4 = 75.131, 100/1.1^5 = 62.09.

Hence, we can see that the discounted payback period will lie between the years 4 and 5. It will be = 4 + (1000-340.91 - 351.24 - 187.8287 - 75.131)/62.09 = 4.722 years.

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