Exercise NPV, IRR & Payback Period

Number 1

Calculate the net present value (NPV) for the following 20-year projects. Comment on the acceptability of each. Assume that the firm has an opportunity cost of 15%.

a)      Initial investment is $10,000; cash inflows are $2,000 per year

b)      Initial investment is $25,000; cash inflows are $3,000 per year

c)       Initial investment is $30,000; cash inflows are $5,000 per year

Number 2

Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is $18,250, and the project is expected to yield after-tax cash inflows of $4,000 per year for 7 years. The firm has a 10% cost of capital.

a)      Determine the net present value (NPV) for the project.

b)      Determine the internal rate of return (IRR) for the project.

c)       Would you recommend that the firm accept or reject the project? Explain your answer.

Number 3

Fitch Industries is in the process of choosing the better of two equal-risks, mutually exclusive capital expenditure projects–M and N. The relevant cash flows for each project are shown in the following table. The firm’s cost of capital is 15%.

	Project M	Project N
Initial investment (CF0)	$28,500	$27,000
Year (t)	Cash inflows (CFt)
1	$10,000	$11,000
2	10,000	10,000
3	10,000	9,000
4	10,000	8,000

a)      Calculate each project’s payback period

b)      Calculate the net present value (NPV) for each project

c)       Calculate the internal rate of return (IRR) for each project

d)      Summarize the preferences dictated by each measure you calculated, and indicate which project you would recommend. Explain why.