Problem 1:
You are considering an investment in a project with a life of eight years, an initial outlay of $120,000, and annual after-tax cash flows of $52,000. The project also requires an increase in inventories of $22,000. This $22,000 investment in inventory is required at the outset of the project and will be released when the project is completed. The appropriate discount rate for this project is 10%.
a. Calculate the payback period for this project.
b. Calculate the NPV for this project.
c. Should this project be accepted? Explain.
Problem 2: Calculate the IRR for the following cash flows. Is the project acceptable if the firm's cost of capital is 12%?
End of Year Cash Flow ($)
0.........................$400,000
1.........................100,000
2..........................200,000
3..........................300,000