Question

Primus Corp. is planning to convert an existing warehouse into a new plant that will increase its production capacity by 45%. The cost of this project will be $7,125,000. It will result in additional cash flows of $1,875,000 for the next eight years. The company uses a discount rate of 12%. 1. What is the payback period? 2. What is the NPV for this project? 3. What is the IRR?Annual Cash Flows

Answer 1

1. 3 years and 9 months

2. $16,439,325

3. 20.33 %

Step-by-step explanation:

The Summary of the Cash Flows for this project will be as follows :

Year 0 - $7,125,000

Year 1 $1,875,000

Year 2 $1,875,000

Year 3 $1,875,000

Year 4 $1,875,000

Year 5 $1,875,000

Year 6 $1,875,000

Year 7 $1,875,000

Year 8 $1,875,000

Payback Period

$7,125,000 = Year 1 ($1,875,000) + Year 1 ($1,875,000) + Year 1 ($1,875,000) + $1,500,000 / $1,875,000

= 3 years and 9 months

Net Present Value (NPV)

Calculation using a financial calculator :

- $7,125,000 CFj

$1,875,000 CFj

$1,875,000 CFj

$1,875,000 CFj

$1,875,000 CFj

$1,875,000 CFj

$1,875,000 CFj

$1,875,000 CFj

$1,875,000 CFj

I/YR 12%

Shift NPV $16,439,325

Internal Rate of Return (IRR)

Calculation using a financial calculator :

- $7,125,000 CFj

$1,875,000 CFj

$1,875,000 CFj

$1,875,000 CFj

$1,875,000 CFj

$1,875,000 CFj

$1,875,000 CFj

$1,875,000 CFj

$1,875,000 CFj

Shift IRR 20.33 %