1) You are presented the asset which costs $14,000 and has cash flows as follows below at the ending of each quarter for the next eight years. Then it will be sold for= $2,500. Your cost of capital is 6.5%. Alternative (mutually exclusive) project is available that offers the accounting rate of return of 8%, a classical payback period of five years and a discounted payback period of five years.
Year 1: $800 each quarter
Year 2: $850 each quarter
Year 3: $850 each quarter
Year 4: $950 each quarter
Year 5: $800 each quarter
Year 6: $600 each quarter
Year 7: $500 each quarter
Year 8: $400 each quarter
i) Compute the IRR of the asset?
ii) Compute the NPV of the asset?
iii) Calculate the PI and NPI of asset?
iv) Write down the classical and discounted payback periods?
v) Write down the four accounting rate of returns (utilizing cash flows)?
vi) Should you purchase it? Base your answer on your solutions of i) to v)
Can you illustrate computations on how to determine IRR, NPV and what not.