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Calculating various capital budgeting parameters

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The Seattle Corporation has been presented with an investment opportunity which will yield end-of-year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 8 percent.

a. What is the Payback Period, Discounted Payback Period, NPV, IRR, and MIRR for this investment?

b. Should the project be accepted or rejected?

Please complete in word and show work

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Solution Preview

Please refer attached file for better clarity of tables and fourmulas.

Solution:

a. What is the Payback Period, Discounted Payback Period, NPV, IRR, and MIRR for this investment?

Let us study cash flows associated with the project

Year End Cash flow Cumulative cash flow PV factor, PVF PV of cash flow Cumulative PV
n C 1/(1+8%)^n C*PVF
1 $30,000 $30,000 0.9259 $27,777.78 $27,777.78
2 30000 60000 0.8573 25720.16 53497.94
3 30000 90000 0.7938 23814.97 77312.91
4 30000 120000 0.7350 22050.90 99363.81
5 35000 155000 0.6806 23820.41 123184.22
6 35000 190000 0.6302 22055.94 145240.15
7 35000 ...

Solution Summary

Solution depicts the steps by step methodology to find payback period, discounted payback period, NPV, IRR and MIRR for the given investment proposal.

$2.19