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Calculating Payback, NPV, IRR and WACC in the given cases

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1. What is the payback for a project that has anticipated cash inflows of $10,000 for 5 years and a cost of $22,000?

2. Good old XYZorp (they're back!) is considering two mutually exclusive projects, A & B in order to expand their product line. After letting the cost accountants out of their cages, it was determined that project A's initial investment must be $42,400, while project B will cost $60,000.
- Project A has projected cash inflows of $25,000 per year for three years. Project B's inflows are more variable: $10,000 in year 1; $30,000 in year 2; and $40,000 in its final year.
- You have determined the following: the Prime is 7%, LIBOR is 6%, the firm's cost of capital is 12%.
- Using NPV analysis, if the NPV for project B = + $ 1,320 (yes, I ddi the computation for you!), which project do you prefer?

3. Given the information for project A in problem 2, what is this project's IRR?
Assuming a target capital structure of:
40% debt
20% preferred stock
40% common equity
What would be the WACC given the following: all debt will be from the sale of bonds with a coupon of 10% (assume no flotation costs), preferred stock's associated cost will be 13%, and common equity will be from retained earnings with an associated cost of 15%. The tax rate for this corporation is 30%.

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Solution Summary

Solutions depict the methodology to estimate the Payback, NPV, IRR and WACC for the given cases.

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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