Primus Corp. is planning to convert an existing warehouse into a new plant that will increase its production capacity by 45 percent. 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 discount rate is 12 percent. a) What is the payback period?
b) What is the NPV for this project?
c) What is the IRR?

3.8 years

$2,189,324.56

20.33%

Explanation:

Payback period calculates how long it takes to recover the amount invested in a project from its cumulative cash flows.

Payback period = amount invested / cash flows = $7,125,000 / $1,875,000 = 3.8 years

Net present value is the present value of after tax cash flows from an investment less the amount invested.  

Net present value can be calculated using a financial calculator

cash flow in year 0 = $-7,125,000.

cash flow each year from year 1 to 8 = $1,875,000

I = 12%

NPV = $2,189,324.56

Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested

IRR can be calculated using a financial calculator

cash flow in year 0 = $-7,125,000.

cash flow each year from year 1 to 8 = $1,875,000

I = 12%

IRR = 20.33%

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

To find the IRR using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.  

answer; functional fixedness;