Answer:
1. Park Co. is considering an investment that requires immediate payment of $31,500 and provides expected cash inflows of $12,000 annually for four years. What is the investment's payback period?
payback period = $31,500 / $12,000 = 2.625 years
2. Park Co. is considering an investment that requires immediate payment of $21,530 and provides expected cash inflows of $6,500 annually for four years. If Park Co. requires a 7% return on its investments. What is the internal rate of return?
using a financial calculator, the IRR = 8%
the IRR is the discount rate that makes a project's NPV = 0
3. Peng Company is considering an investment expected to generate an average net income after taxes of $3,400 for three years. The investment costs $50,400 and has an estimated $10,200 salvage value. Assume Peng requires a 10% return on its investments. Compute the net present value of this investment. Assume the company uses straight-line depreciation.
depreciation per year = ($50,400 - $10,200) / 3 = $13,400
net cash flows:
- year 0 = -$50,400
- cash flow year 1 = $3,400 + $13,400 = $16,800
- cash flow year 2 = $3,400 + $13,400 = $16,800
- cash flow year 3 = $3,400 + $13,400 + $10,200 = $27,000
NPV = -$50,400 + $16,800/1.1 + $16,800/1.1² + $27,000/1.1³ = -$50,400 + $49,442.52 = -$957.48
