Calculating Payback, NPV and IRR
Not what you're looking for?
Winston Clinic is evaluating a project that costs $52,125 and has expected net cash flows of $12,000 per
year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of
capital of 12 percent.
a. What is the project's payback?
b. What is the project's NPV? Its IRR?
c. Is the project financially acceptable? Explain your answer.
Better Health, Inc. is evaluating two investment projects, each of which requires an up-front expenditure
of $1.5 million. The projects are expected to produce the following net cash inflows:
Year Project A Project B
0 -$1,500,000 -$1,500,000
1 $500,000 $2,000,000
2 $1,000,000 $1,000,000
3 $2,000,000 $600,000
a. What is each project's IRR?
b. What is each project's NPV if the cost of capital is 10 percent? 5 percent? 15 percent?
Purchase this Solution
Solution Summary
The expert calculates payback, NPV and IRR.
Solution Preview
Please refer to the attachments.
1. Winston Clinic is evaluating a project that costs $52,125 and has expected net cash flows of $12,000 per year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of capital of 12 percent.
a. What is the project's payback?
Since the cash flow is constant, the payback period is simply the total cost divided by the cash flow. That is 52125/12000 = 4.34 (years)
b. What is the project's NPV? Its IRR?
We can compute the present value (PV) of each cash flow (CF) by the following formula:
PV = CF/(1+12%)year
Year Cash Flow Present Value
0 -52,125 -52,125
1 12,000 10,714
2 12,000 9,566
3 12,000 8,541
4 12,000 7,626
5 12,000 ...
Purchase this Solution
Free BrainMass Quizzes
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
Writing Business Plans
This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.
Basic Social Media Concepts
The quiz will test your knowledge on basic social media concepts.
Situational Leadership
This quiz will help you better understand Situational Leadership and its theories.
Academic Reading and Writing: Critical Thinking
Importance of Critical Thinking