Question

Fernando Designs is considering a project that has the following cash flows and WACC data. What is the project's discounted payback period? (6 points) What is the project’s modified internal rate of return?

Answer 1

Answer:

Discounted Payback period 3 years

Modified Internal rate of return 4.833%

Explanation:

Fernando Designs has following cash flows ,

year 1 : -$900

Year 2 : $500

Year 3 : $500

Year 4 : $500

Using 10% discount factor the cashflows will be,

discounted values

Year 1 : -900

Year 2 : 454.54

Year 3 : 445.45

Year 4 : 4132231

Payback period is -900 + 454.54 +445.45 = 3 years.

Modified Internal rate of return; $\sqrt[n]{\frac{FV of cash inflows}{PV of cash outflow} }$

$\sqrt[4]{\frac{1314}{900} }$ = 4.833%