Reference no: EM132969919
A company is considering an investment project which involves the purchase of machinery. The project has a four year life at the end of which the machinery will be sold for £40,000. The project will result in the following cash flows:
Initial investment £120,000
Year 1 cash inflow £35,000
Year 2 cash inflow £40,000
Year 3 cash inflow £55,000
Year 4 cash inflow £30,000
The company's policy is to depreciate machinery on a straight line basis over its estimated life. The company has a cost of capital of 10%.
Problem 1: The payback period for the proposed investment, to the nearest month, is:
Select one:
A. 3 year 10 months
B. 2 years 1 month
C. 4 years
D. 2 years 10 months
Problem 2: The net present value of the proposed investment is:
Select one:
A. £100,000
B. £66,650
C. £26,650
D. £33,970
Problem 3: The internal rate of return of the proposed investment is:
Select one:
A. 10%
B. Lower than 10%
C. Higher than 10%
D. Lower than the cost of capital
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