Answer:
Part 1. NPV $346,465
Part 2. IRR is 19.8%
Part 3. 3 Years
Part 4. 13.33%
Explanation:
<u>Part 1.</u>
Year Cash Flow DF at 14% Discounted Cash flow
0 -2,400,000 1.00 -2,400,000
1 800,000 0.8772 701,754
2 800,000 0.7695 615,574
3 800,000 0.6750 539,977
4 800,000 0.5921 473,664
5 800,000 0.5194 <u> 415,495 </u>
NPV $346,465
<u>Part 2.</u>
Year Cash Flow DF at 14% Disc.Cash flow DF at 20% Disc. Cash flow
0 -2,400,000 1.0000 -2,400,000 1.0000 -2400,000
1 800,000 0.8772 701,754 0.8333 666,667
2 800,000 0.7695 615,574 0.6944 555,556
3 800,000 0.6750 539,977 0.5787 462,963
4 800,000 0.5921 473,664 0.4823 385,802
5 800,000 0.5194 <u> 415,495 </u> 0.4019 <u> 321,502</u>
NPV $346,465 -$7510
IRR can be calculated by using the following formula:
IRR = R at lower %age + (R at Higher %age - R at Lower %age) * NPV at lower Percentage / (NPV at Higher %age - NPV at Lower %age)
Now by putting values, we have:
IRR = 14% + (20% - 14%) * 346,465 / (346,465 + 7510)
IRR = 14% + 5.8% = 19.8%
<u>Part 3.</u>
Now by putting values, we have:
Payback Period = Initial Investment / Cash flow Per Period
Payback Period = $2,400,000 / $800,000 = 3 Years
<u>Part 4.</u>
As we know that:
Simple Rate Of Return = Net operating income ÷ Initial investment
Now by putting values, we have:
Simple Rate Of Return = $320,000 / $2,400,000 = 13.33%
