Chapter 5, Problem 19QAP

Summary Introduction

Adequate information:

Discount rate= 15%

Initial investment of Project NP-30 = $735,000

Cash flow per year from Project NP-30 for next 5 years = $239,000

Initial investment of Project NX-20 = $460,000

Cash flow from Project NX-20 at Year 1= $130,000

Cash flow from Project NX-20 at Year 2 = $143,000

Cash flow from Project NX-20 at Year 3 = $157,300

Cash flow from Project NX-20 at Year 4 = $173,030

Cash flow from Project NX-20 at Year 5 = $190,333

To compute: Payback period, IRR, PI, and NPV of both the projects and their implications.

Introduction: IRR is the rate that produces zero NPV, that is, the present value of aggregate cash inflows is the same as the present value of aggregate cash outflows. It is also known as the economic rate of return.