Van Auken Inc. is considering a project that has the following cash flows: The company's WACC is 10%. What are the project's payback, IRR, and NPV?
A) payback = 2.4, IRR = 10.00%, NPV = $600
B) payback = 2.4, IRR = 21.22%, NPV = $260
C) payback = 2.6, IRR = 21.22%, NPV = $300
D) payback = 2.6, IRR = 21.22%, NPV = $260

Question

Van Auken Inc. is considering a project that has the following cash flows:  The company's WACC is 10%. What are the project's payback, IRR, and NPV?
A) payback = 2.4, IRR = 10.00%, NPV = $600 
B) payback = 2.4, IRR = 21.22%, NPV = $260 
C) payback = 2.6, IRR = 21.22%, NPV = $300 
D) payback = 2.6, IRR = 21.22%, NPV = $260

Quizplus · Accepted Answer

To calculate payback, we need to find the year in which the cumulative cash flows equal the initial investment. Using this method, we see that the payback period for this project is 2.6 years.

To calculate the IRR, we need to find the discount rate that makes the NPV of the project equal to zero. Using this method, we find that the IRR for this project is 21.22%.

To calculate the NPV, we need to discount the cash flows at the company's WACC and subtract the initial investment. Using this method, we find that the NPV for this project is $260.

The best answer is D because it is the only one that has all three calculations correct.