A company is considering a high-tech project lasting five years. The project requires $800,000 of initial investment and generates net cash flows of $200,000, $300,000, $300,000, $200,000, and $300,000 in years 1, 2, 3, 4, and 5, respectively. Therefore, the cash flows are as follows

A company is considering a high-tech project lasting five years. The project requires $800,000 of initial investment and generates net cash flows of $200,000, $300,000, $300,000, $200,000, and $300,000 in years 1, 2, 3, 4, and 5, respectively. Therefore, the cash flows are as follows:

Year     Cash Flow

0          -800,000

1          200,000

2          300,000

3          300,000

4          200,000

5          300,000                                                                                                      Click here for SOLUTION

The appropriate discount rate (or the cost of capital) is 10%.

1. If the company uses the NPV method, should the project be accepted? Why (or why not)?

2. If the company uses the IRR method, should the project be accepted? Why (or why not)?

3. The company’s maximum acceptable payback period is 3 years. If the company uses the payback period method, should the project be accepted? Why (or why not)?

4. Would you accept a project which requires $50,000 of initial investment and yields $10,000 every year infinitely? Why (or why not)? Assume that the discount rate (or the cost of capital) is 10%.

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