Calculating NPV, PV ratio, IRR and payback period
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Lynn Co. is considering the investment of $90,000 in a new machine. The machine will generate cash flow of $10,000 per year for each year of its 15 year life and will have a salvage value of $5,000 at the end of its life. Lynn Co.'s cost of capital is 8%.
(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and round all answers to the nearest $1.
(b.) Calculate the present value ratio of the investment.
(c.) What will the internal rate of return on this investment be relative to the cost of capital (higher, lower, or the same)? Explain your answer.
(d.) Calculate the payback period of the investment.
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Solution depicts the steps to calculate NPV, PV ratio, IRR and payback period for the proposed investment.
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Please refer attached file for better clarity of formulas.
Solution:
(a) Calculate the net present value of the proposed investment. Ignore income taxes, and
round all answers to the nearest $1.
Salvage value=$5000
Discount rate=i=8%
Number of periods=n=15
Discount rate=i=8%
Annual uniform cash inflow=R=$10000
Present value of salvage value to be received after 15 years=5000/(1+8%)^15=$1576
Present Value of ordinary annuity of $10000 ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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