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Reynolds Enterprises is attempting to evaluate the feasibility of investing $85000 CF0 in a machine having a 5 year life The firm has estimated the cash inflows associated with the proposal as

Reynolds Enterprises is attempting to evaluate the feasibility of investing $85,000, CF0, in a machine having a 5-year life. The firm has estimated the cash inflows associated with the proposal as shown below. The firm has a 12 percent cost of capital.

End of Year (t) Cash Inflows (CFt)
1 $18,000
2 $22,500
3 $27,000
4 $31,500
5 $36,000

 

a.   Calculate the payback period for the proposed investment.

b.   Calculate the NPV for the proposed investment.

c.   Calculate the IRR 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? Why?

 

I believe the answers are as follows:

a.         The payback period is 3.56 years

b.   NPV is $8,672.54

c.   IRR is 15.6% or 16%

d.   This project is acceptable by both NPV and IRR criteria. It has a positive NPV and its IRR is greater than its hurdle rate of 12%.

What is the formulas used to calculate these answers?

 

May 20 2020 View more View Less

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