Question

Long Futures, Inc. has been presented with an investment opportunity which will yield end-of-year cash flows of $56,000 per year in Years 1 through 4, $75,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $320,000 today, and the firm's cost of capital is 12 percent.

1. What is the NPV for this investment? (In Box 1; Round it to a whole dollar and without the dollar sign.)

2. What is the IRR of the investment? (In Box 2; Answer in percentage, but without the % sign, and round it to one decimal place)

3. Compute the payback. (Box 3; Round it to one decimal place)

Box # 1 _______

Box # 2_______

Box # 3_______

Answer 1

1. The NPV of Long Futures:

($3,20,000) + $56,000/1.12 + $56,000/1.12^2 + 56,000/1.12^3 + 56,000/1.12^4 + $75,000/1.12^5 + $75,000/1.12^6 + $75,000/1.12^7 + 75,000/1.12^8 + 75,000/1.12^9 + 40,000/1.12^10

= $34,788.0263

= 34,800 (rounded off to whole dollar )

2. the IRR of the project will be :

IRR is the rate at which , the NPV is zero.

($3,20,000) + $56,000/(1+irr) + $56,000/(1+irr)^2 + 56,000/(1+irr)^3 + 56,000/(1+irr)^4 + $75,000/(1+irr)^5 + $75,000/(1+irr)^6 + $75,000/(1+irr)^7 + 75,000/(1+irr)^8 + 75,000/(1+irr)^9 + 40,000/(1+irr)^10 = 0

Solving which we get, IRR =

=14.5 (rounded off to one decimal place)

3. Payback period:

The number of years it takes to recover the initial investment of the project:

In 5 years (56,000* 4+ 75,000 = $299,000 of the investment is recovered), the remaining is recovered in ,

= 5 + $21,000/ 75,000

= 5.3 years (rounded off to one decimal place)