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Accelerate collection of cash; IRR NPV WACC IRR payback

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Consider the following potential investment, which has the same risk as the firm's other projects:
Time Cash Flow
0 -$75,000
1 $10,000
2 $16,000
3 $18,000
4 $18,000
5 $18,000
6 $20,000

a) What are the investment's payback period, IRR, and NPV, assuming the firm's WACC is 10%.
b) If the firm requires a payback period of less than 5 years, should this project be accepted?
c) Based on the IRR and NPV rules, should this project be accepted?
d) Which of the decision rules (payback, NPV, or IRR) do you think is the best rule for a controller to use when evaluating projects? Be sure to justify your choice.

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Solution Summary

Responses to each query given briefly and clearly.

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a) What are the investment's payback period, IRR, and NPV, assuming the firm's WACC is 10%.

See the attached file.

b) If the firm requires a payback period of less than 5 years, should this project be accepted?

No, payback occurs in year 5. See cumulative return column ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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