Part : Capital Budgeting
Walmart, Inc. is considering an investment in new self-checkout machines to improve the customer experience at its stores. The investment requires an initial outlay of $60,000 and yields the following expected cash flows:
Year 1: $25,000
Year 2: $29,000
Year 3: $31,000
The Chief Operating Officer (COO) requires a payback period of 2 years and a 10% return on investment in order to approve the project.
Required.
a. Compute the payback period for the self checkout machines (use average annual net cash flows). Does it meet the COO’s requirement?
b. Compute the Net Present Value of the investment. Use the following present value formula:
PV = FV / (1+i)^n. Based only on the NPV, should the COO approve the project?
c. The internal rate of return (IRR) on the project is 19%. Based only on IRR, should the COO approve the project?