Question

A project has an initial cost of $15,000 and produces cash inflows of $2,000 forever. Compute the payback period, NPV, IRR, and PI if the required rate of return is 10%.

Answer 1

1.

Payback period is the time when initial investment returns back as cash inflow

Payback Period = 1(2000) + 1(2000) + 1(2000) + 1(2000) + 1(2000) + 1(2000) + 1(2000) 0.50(1000/2000)

Payback Period = 7.50 years

2.

NPV = -Initial Investment + PV(Cash Inflow)

Present Value of Perpetuity = Annual Cash Flow/Interest Rate

Present Value = 2000/(0.10)

Present Value = $20,000

So,

NPV = -15,000 + 20,000

NPV = $5,000

3.

IRR is the rate at which NPV = 0,

15000 = 2000/IRR

So,

IRR = 2000/15000

IRR = 13.33%

4.

PI = PV of Future Cash Flow/Initial Investment

PI = 20000/15000

PI = 1.33