Question

Rieger International is evaluating the feasibility of investing ​$94000 in a piece of equipment that has a 5​-year life. The firm has estimated the cash inflows associated with the proposal as shown in the following​ table: The firm has a 11​% cost of capital.

Year ​(t​)	Cash inflows​ (CF)
1	​$40,000
2	​$40,000
3	​$25,000
4	​$25,000
5	​$20000

a.  Calculate the payback period for the proposed investment.

b.  Calculate the net present value​ (NPV) for the proposed investment.

c.  Calculate the internal rate of return ​(IRR)​, rounded to the nearest whole​ percent, for the proposed investment.

d.  Evaluate the acceptability of the proposed investment using NPV and IRR. What recommendation would you make relative to implementation of the​ project?

Answer 1

a. Payback period formula = Years before recovery + Cost not covered in that year/ Cash flow for that year
=2+(94000-40000-40000)/25000 =2.56 years

b. NPV of Proposed Project =PV of Cash Flows-Initial Investment =40000/(1+11%)+40000/(1+11%)^2+25000/(1+11%)^3+25000/(1+11%)^4+20000/(1+11%)^5-94000 =21118.02

c. IRR using financial calculator
CF0=-94000;CF1=40000;CF2=40000;CF3=25000;CF4=25000;CF5=20000;CPT IRR =16.02%

d. Based on NPV the project should be accepted
Based on IRR project should be accepted
Hence Project should be accepted