Company XYZ is considering a new investment that requires an initial outlay of $500,000. The investment is
Question:
Company XYZ is considering a new investment that requires an initial outlay of $500,000. The investment is expected to generate cash flows of $200,000 in year 1, $250,000 in year 2, $300,000 in year 3, $350,000 in year 4, and $400,000 in year 5. The cost of capital for this project is 12%. The company plans to sell the investment at the end of year 5 for $50,000.
a) Calculate the net present value (NPV) of the investment and determine whether the investment should be accepted or rejected.
b) Calculate the payback period of the investment and interpret the result.
c) Calculate the internal rate of return (IRR) of the investment and interpret the result.
d) Calculate the profitability index (PI) of the investment and interpret the result.
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter