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##### Financial Management [23]

0.0 0.370 6,304.8
Year 7 15,000.0 0.314 4,710.0
Year 8 15,000.0 0.266 3,990.0
Present Value of free cash flow   83,155.0
Initial outlay   (85,000.0)

If desired, the actual rate can be more precisely approximated through interpolation as follows:
Discount rate Present Value (\$)
15% 90,785.8
IRR 85,000
18% 83,155.0
The difference of present value between 15% and IRR is \$5,785.8 and the difference of present value between 15% and 18% is \$7,630.8.
Thus, IRR = 15% + (5,785.8 / 7,630.8) x 3% = 17.27% or 0.1727
[ Arthur J. Keown; John D. Martin; J. William Petty; David F. Scott. JR, 2005, Financial Management, 10th Edition, P299]The internal rate of return is defined as the discount rate that equates the present value of the project’s future net cash flows with the project’s initial cash outlay. The decision rule of this is that we accept the project if the internal rate of return is greater than or www.51lunwen.org equal to the required rate of return. Conversely, we reject the project if the internal rate of return is less than the required rate of return.
The IRR for this project could be different for SRC than for another customer, since another customer might have different present value of this project which is changes the project’s IRR.
QUESTION 3
a.
Cash flow Net cash flow
Initial cash outlay (\$) -85,000 -85,000
Annual free cash flows (\$):
Year 1 19,816.2 -65,183.80
Year 2 21,376.9 -43,806.90
Year 3 16,116.5 -27,690.40
Year 4 13,031.6 -14,658.80
Year 5 11,637.5 -3,021.30
Year 6 9,610.6 6,589.30
Year 7 7,695.0 14,284.30
Year 8 7,005.0 21,289.30

From the table showing above, we can notice that after 5 years the net cash flow is negative while after 6 years the net cash flow is positive, thus the payback period occurs sometime during the fifth year. Therefore, the project’s payback period = 5 + 3,021.30 / 9,610.6 = 5.31 years.

b. [ Arthur J. Keown; John D. Martin; J. William Petty; David F. Scott. JR, 2005, Financial Management, 10th Edition, P292]The payback period is a capital budgeting criterion defined as the number of years required to recover the initial cash investment. The decision criterion is that the payback period is less than or equal to the maximum acceptable payback period then we accept the project. Conversely, if the project’s payback period is greater than the maximum acceptable payback period, then we reject the project.
c. There are several disadvantages of payback period as a capital budgeting decision methods. First of all, [ Arthur J. Keown; John D. Martin; J. William Petty; David F. Scott. JR, 2005, Financial Management, 10th Edition, P315]payback period ignores the time value of money. Subsequently, it ignores free cash flows occurring after the payback period. On the other hand, the selection of the maximum acceptable payback period is arbitrary.

d. Yes, payback period does provide useful information regarding capital budgeting decisions, since it helps us to measure how [ Arthur J. Keown; John D. Martin; J. William Petty; David F. Scott. JR, 2005, Financial Management, 10th Edition, P292]quickly the project will return its original investment. However, it论文英语论文网提供整理，提供论文代写英语论文代写代写论文代写英语论文代写留学生论文代写英文论文留学生论文代写相关核心关键词搜索。

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