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    PQR Company

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    PQR Company is considering an investment in a piece of equipment that costs $25,000, has a useful life of four years, and generates annual savings net of taxes (i.e., ignore taxes for this problem) of $10,000 per year. Management uses a 14% discount rate for its minimum.
    1. What is the NPV?
    2. What is the Payback Period?
    3. What is the Discounted Payback?
    4. What is the approximate IRR?
    5. What is the Profitability Index?

    Here is my answer NVP which I think is incorrect. Not sure how to approach 2-5.

    ANSWER

    Interest rate / Discount 14%

    Year 0 1 2 3 4

    Cash flow (25,000) 10,000 10,000 10,000 10,000
    PV factor 100% 88% 77% 67% 59%
    PV of cash flow (25,000) 10,000 10,000 10,000 10000
    Cumulative PV (25,000) (15,000) (5,000) 5,000 15,000
    Net Present Value 15,000

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    PQR Company is considering an investment in a piece of equipment that costs $25,000, has a useful life of ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer what is the NPV.

    $2.19

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