Question #1
Consider the following potential investment, which has the same risk as the firm's other projects:
Time Cash Flows
0 ($400,000)
1 $100,000
2 $102,000
3 $105,000
4 $110,000
5 $110,000
6 $115,000
A) What are the investment's payback period, IRR, and NPV, assuming the firm's WACC is 12%?
B) If the firm requires a payback period of less than 4 years, should this project be accepted? Be sure to justify your choice.
C) Based on the IRR and NPV rules, should this project be accepted? Be sure to justify your choice.
D) Which of the decision rules (payback, NPV, or IRR) do you think is the best rule for a firm to use when evaluating projects? Be sure to justify your choice.