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Winston Clinic is evaluating a project that costs $61,500 and has expected net cash inflows of $15,000 per year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of capital of 11 percent. a. What is the project's payback? b. What is the project’s NPV? It’s IRR? It’s MIRR?

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Answer:

Payback Period = 4 Years

Net Present value = $15692

Internal Rate of Return = 17.82%

Modified Internal Rate of Return = 14.20%

Explanation:

Payback Period = (Initial Investment / Net Cash inflows)

Payback Period = $61500/15000 = 4 Years

Net Present value using PVIF table value at 11% over the period and discount them given cash flows gives us discounted cash flows.

Year  CF       PVIF 11%,n   Discounted CF

0 -61500  1.000   (61,500)

1 15000  0.901   13,514  

2 15000  0.812   12,174  

3 15000  0.731   10,968  

4 15000  0.659   9,881  

5 15000  0.593   8,902  

6 15000  0.535   8,020  

7 15000  0.482   7,225  

8 15000  0.434   6,509  

Summing up the discounted Cash flows gives us the Net Present value of $15692

Internal Rate of Return:

Using Excel Function IRR @ 17.82% applying it on cash flows gives the rate where Present value of Cash flows is Zero.

Modified Internal Rate of Return:

Modified internal rate of return is at the level of 14.20% as it lower than IRR because it assume positive cash flows invested at cost of capital.  

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