Final answer:
To assess the given investment, several financial metrics such as NPV, payback period, IRR, and MIRR need to be calculated using the provided cost, economic life, cash flows, and discount rates.
Step-by-step explanation:
Analysis of an Investment Decision
When analyzing an investment with a cost of $200,000 and an economic life of 10 years, generating annual cash flows of $45,000, different financial metrics can be calculated to assess the investment's viability. First, we find the project's Net Present Value (NPV) using a discount rate of 8%. NPV is the sum of the present values of all cash flows associated with the investment, both incoming and outgoing. We calculate it using the formula:
NPV = Σ (Cash Flow / (1+r)^t) - Initial Investment
where r is the discount rate and t is the time period. Applying this calculation to the given values, we obtain the NPV for this project.
Second, we calculate the project's payback period, which is the time needed for the investment to recoup its initial cost from the cash flows it generates. The project's payback is calculated by dividing the initial investment by the annual cash inflow.
Third, we determine the project's Internal Rate of Return (IRR), which is the discount rate that makes the project's NPV equal to zero. It's found through a trial and error approach or using financial calculators or software.
Lastly, considering a reinvestment rate of 6%, we calculate the project's Modified Internal Rate of Return (MIRR). MIRR is the discount rate that equates the present value of the cash inflows reinvested at the reinvestment rate to the initial investment.