Question

1. 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

1. If WACC is 10%, what is NPV, and should the company accept the project?
2. 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.