Question

You have recently won some money playing bingo and are in a dilemma of what you do with the money. Being the savvy finance person that you are, you decide to invest. You begin to are consider a project with an initial cash outlay of $80,000 and expected cash flows of $20,000 at the end of each year for 6 years. The required rate of return for each project is 10 percent.

A. What is the projects payback period?
B. What is the project's NPV?
C. What is the project's PI?
D. What is the project's IRR?

Answer 1

Answer:

A. 4 Years

B. $7,105

C. 1.09

D. 13%

Explanation:

A.

payback period is the time in which a project returns back the initial investment.

Project cash back period = Initial Investment / Cash flow per year = $80,000 / $20,000 = 4 years

B.

NPV the sum of present values of all the cash inflows and outflows associated with the project.

NPV

As the fixe payment $20,000 made for 6 years at 10%, this the annuity and its present value can be calculated as follow.

Present value of Annuity = P x [ ( 1- ( 1+ r )^-n ) / r ] = $20,000 x [ ( 1- ( 1+ 10% )^-6 ) / 10% ] = $87,105

Net present value = Present value of annuity - Initial outlay = $87,105 - $80,000 = $7,105

C.

Profitability Index if the ration of Net present value and the initial investment of the project.

Profitability Index = ( NPV + Initial Investment) / Initial Investment = ( $80,000 + $7,105 ) / $80,000 = 1.09

D.

IRR is the rate at which the net present value of project becomes zero.

IRR = 12.98% or 13%

Working for IRR is attached with the answer.