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23 May, 07:10

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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  1. 23 May, 07:35
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    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.
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