Question

Project Y costs $50,000, its expected cash inflows are as follows-- year 1: $19,000; year 2: $20,000; year 3: $18,000; year 4: $19,000; year 5 $20,000; year 6: $17,000, and its WACC is 7%.
a. What is the project's NPV?
b. What is the project's IRR?
c. What is the project's MIRR?
d. What is the project's Payback Period?
e. What is the project's Discounted Payback?

Answer 1

Answer:

a. $40,001.70

b. 30.19 %

c. 18,01% .

d. 2 years and 7 months

e. 3 years

Explanation:

Calculation of NPV using a financial calculator :

-$50,000    CFj

$19,000      CFj

$20,000     CFj

$18,000      CFj

$19,000      CFj

$20,000     CFj

$17,000      CFj

i/yr                7%

Shift NPV   $40,001.70

Calculation of IRR using a financial calculator :

-$50,000    CFj

$19,000      CFj

$20,000     CFj

$18,000      CFj

$19,000      CFj

$20,000     CFj

$17,000      CFj

Shift IRR      30.19 %

Calculation of MIIR :

The First Step is to Calculate the Terminal Value at end of year 6.

Terminal Value (FV) = Sum of (PV x (1 + r) ^ 6 - n)

                                 =$19,000 x (1.07) ^ 5 + $20,000 x (1.07) ^ 4 + $18,000 x (1.07) ^ 3 + $19,000 x (1.07) ^ 2 + $20,000 x (1.07) ^ 1 + $17,000 x (1.07) ^ 0

                                 = $26,648.48 + $26,215.92 + $22,050.77 + $21,753.10 +  $21,400 + $17,000

                                 = $135,068.27

The Next Step is to Calculate the MIRR using a Financial Calculator :

-$50,000 CFj

0          CFj

0            CFj

0          CFj

0          CFj

0                      CFj

$135,068.27   CFj

Shift IRR/Yr 18,01%

Therefore, the MIRR is 18,01% .

Calculation of the Payback Period :

$50,000 = Year 1 ($19,000) + Year 2 ($20,000) + $11,000 / $18,000

               = 2 years and 7 months

Calculation of the project's Discounted Payback :

$50,000 = $19,000 / (1.07)^1 + $20,000 / (1.07)^2 + $18,000/ (1.07)^3 + $19,000/ (1.07)^4

              = Year 1 ($17,757.01) + Year 2 ($17,468.77) + Year 3 ($14,693.36) + $80.83 / $14,495

              = 3 years