Answer:
A, 3.8 years
b NPV = $2,189,324.56
c. IRR = 20.33%
d. Primas Corp can carry out the conversion because it would be profitable all other things being equal
Explanation:
Payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative cash flows
Payback period = amount invested / cash flow = $7,125,000 / $1,875,000 = 3.8 years
Net present value is the present value of after tax cash flows from an investment less the amount invested.
Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested
NPV and IRR can be calculated using a financial calculator
Cash flow in year 0 = $-7,125,000
Cash flow each year from year 1 to 8 = $1,875,000
I = 12%
NPV = $2,189,324.56
IRR = 20.33%
D.the NPV is positive and the IRR exceeds the discount rate so the project is profitable and the company should undertake the project
To find the NPV using a financial calculator:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.
3. Press compute
To find the IRR using a financial calculator:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. After inputting all the cash flows, press the IRR button and then press the compute button.
