Question

Comparing all

methods.

Risky Business is looking at a project with the estimated cash flow as? follows:

Initial investment at start of? project:?? ?$10,900,00 Cash flow at end of year? one:?? ?$1,853, 000 Cash flow at end of years two through? six:?? ?$2,180,000 each year Cash flow at end of years seven through? nine:?? ?$2,408, 900, each year Cash flow at end of year? ten:?? ?$1,853,000

Risky Business wants to know the payback? period, NPV,? IRR, and PI of this project. The appropriate discount rate for the project is

12%

If the cutoff period is six years for major? projects, determine whether the management at Risky Business will accept or reject the project under the five different decision models.

Answer 1

NOTE: Requesting the question poster to recheck the initial investment amount as the same is too low to generate such high cash flows. Further, payback periods of less than 1 and IRR of 180 % are unusual. The solution provided is for the initial investment of $1090000 mentioned in the question. Any extra number of zeros in the initial investment value will drastically change the answers. Please recheck the initial investment value and intimate changes if any through comments so that an edited solution can be provided

As the project has first-year cash flow of $ 1853000 and an initial investment of 109000, the project's payback period is less than a year and is in fact (1090000 / 1853000) = 0.588 years. The project's IRR would be calculated using the EXCEL Goal Seek Function.

As the project's payback period is much lower than the cut off period of 6 years, the project should be accepted.