How do I solve this? Need to show work.
Questions:
#1 - #3: A small factory that makes electrical components is considering a project which might generate future cash flows as follows. The company will make a decision whether they will undertake this project based on the Net Present Value analysis/Payback period/IRR method.
Project:
Initial investment = $100 million
Net cash flows Year 1 Year 2 Year 3 Year 4
($million) 34 30 40 36
1. What is the payback period of this project? If the hurdle period for the payback period method to evaluate this project is 4 years, what is your decision on this project?
Answer: Around 3 years and accept
2. What is the Net Present Value of these cash flows assuming that the WACC (can used as a discount rate) of the factory is 10%? What is your decision on this project based on the result from NPV of this project?
Answer: $10.346 million and accept
3. What is the IRR (Internal Rate of Return) of this project? If the WACC of the factory is 10%, what is your decision on this project?
Answer: 14.58% and accept
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