Winston Clinic is evaluating a project that costs $61,500 and has expected net cash inflows of $15,000 per year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of capital of 11 percent. a. What is the project's payback? b. What is the project’s NPV? It’s IRR? It’s MIRR?

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kashif9462675 kashif9462675 · Answer 1 · 2019-08-06T11:06:01+02:00

Answer:

Payback Period = 4 Years

Net Present value = $15692

Internal Rate of Return = 17.82%

Modified Internal Rate of Return = 14.20%

Explanation:

Payback Period = (Initial Investment / Net Cash inflows)

Payback Period = $61500/15000 = 4 Years

Net Present value using PVIF table value at 11% over the period and discount them given cash flows gives us discounted cash flows.

Year CF PVIF 11%,n Discounted CF

0 -61500 1.000 (61,500)

1 15000 0.901 13,514

2 15000 0.812 12,174

3 15000 0.731 10,968

4 15000 0.659 9,881

5 15000 0.593 8,902

6 15000 0.535 8,020

7 15000 0.482 7,225

8 15000 0.434 6,509

Summing up the discounted Cash flows gives us the Net Present value of $15692

Internal Rate of Return:

Using Excel Function IRR @ 17.82% applying it on cash flows gives the rate where Present value of Cash flows is Zero.

Modified Internal Rate of Return:

Modified internal rate of return is at the level of 14.20% as it lower than IRR because it assume positive cash flows invested at cost of capital.