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Why is it difficult to calculate the payback period

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Reference no: EM131108268

Froogle Enterprises is evaluating an unusual investment project. What makes the project unusual is the stream of cash inflows and outflows shown in the following table:

Year Cash flow

0 ....... $ 200,000

1 ........ -920,000

2 ....... 1,582,000

3 ........ -1,205,200

4 ........ 343,200

a. Why is it difficult to calculate the payback period for this project?

b. Calculate the investment's net present value at each of the following discount rates: 0%, 5%, 10%, 15%, 20%, 25%, 30%, 35%.

c. What does your answer to part b tell you about this project's IRR?

d. Should Froogle invest in this project if its cost of capital is 5%? What if the cost of capital is 15%?

e. In general, when faced with a project like this, how should a firm decide whether to invest in the project or reject it?

Reference no: EM131108268

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