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# Project's Payback period, NPV, PI, and IRR.

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You are considering a project with an initial cash outlay of \$80,000 and expected free cash flows of \$20,00 at the end of each year for 6 years. The required rate of return for this project is 10 percent.
a. What is the project`s payback period?
b. What is the project's NPV?
c. What is the project's PI?
d. What is the project's IRR?

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#### Solution Preview

You are considering a project with an initial cash outlay of \$80,000 and expected free cash flows of \$20,000 at the end of each year for 6 years. The required rate of return for this project is 10 percent.

Note: Except for easy and straightforward calculations, it is recommended to use Financial Calculators (usually free online) or any other software that is easy for you to calculate complex formulas. For clarification, I included definitions of each terms of the required fields.

a. What is the projects payback period?

Payback period is the length of time needed to recoup an investment on a project. This project's payback period is the time period to regain the cost of the \$80,000 investment. The lesser the payback period, the better it is to take up action and begin the project.
Formula for Payback period:
Payback Period = Initial Investment ÷ Annual Cash Flow
For the project in this case, the payback period is calculated below:
= \$80,000 ÷ \$20,000
= 4 ...

#### Solution Summary

Project's payback period, NPV, PI, and IRR are examined.

\$2.19
Similar Posting

## Payback period, NPV, PI, and IRR calculations & Capital rationing

10-5: (Payback period, NPV, PI, and IRR calculations) You are considering a project with an initial cash outlay of \$80,000 and expected free cash flows of 20,000 at the end of each year for 6 years. The required rate of return for this project is 10 percent.
a. What is the project's payback period?
b. What is the project's NPV?
c. What is the project's PI?
d. What is the project's IRR?

10-16: (PI calculation) Calculate the PI given the following cash flows if the appropriate required rate of return is 10%.

Year Cash Flows
0 - 55,000
1 10,000
2 10,000
3 10,000
4 10,000
5 10,000
6 10,000

Should the project be accepted? Without calculating the NPV, do you think it would be positive or negative? Why?

10-29: (Capital rationing) The Cowboy Hat Company of Stillwater, Oklahoma, is considering seven capital investment proposals for which the total funds available are limited to a maximum of \$12 million. The projects are independent and have the following costs and profitability indexes associated with them:
Project Cost Profitability Index
A \$ 4,000,000 1.18
B \$ 3,000,000 1.08
C \$ 5,000,000 1.33
D \$ 6,000,000 1.31
E \$ 4,000,000 1.19
F \$ 6,000,000 1.20
G \$ 4,000,000 1.18

a. Under strict capital rationing, which projects should be selected?
b. What problems are there with capital rationing?

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