Reiger International is attempting to evaluate the feasibility of investing $95,
ID: 2764162 • Letter: R
Question
Reiger International is attempting to evaluate the feasibility of investing $95,000 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 12% cost of capital
Year (t) Cash Inflows (CFt)
1 $20,000
2 25,000
3 30,000
4 35,000
5 40,000
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 for the proposed investment using NPV and IRR. What recommendation would you make relative to implementation of the project? Why?
Explanation / Answer
Solution.
a. Calculation of the payback period for the proposed investment.
Payback period = 3 + ( 20,000 / 35,000 ) .57
= 3.57 year.
b. Calculate the net present value (NPV) for the proposed investment.
c. Calculate the internal rate of return (IRR).
D.
Acording to NPV and IRR Proposal is acceptable because NPV is posetive and IRR is also gretor than 1.
Year (t) Cash Inflows (CFt) Cumulative 0 (95,000.00) 1 20,000.00 20,000.00 2 25,000.00 45,000.00 3 30,000.00 75,000.00 4 35,000.00 110,000.00 5 40,000.00 150,000.00 Total 150,000.00