The finance team of Saray Co. has put together the following cash flow that you will need to make an accept/reject decision on using tools such as Net Present Value (NPV), Internal Rate of Return (IRR)and Payback period.
Cost Today -$6,000
Cash Flow per Year for 6 Years $1,400
Cost of Capital 9.5%
This problem may require a review of present value concepts. The $1,400 per year cash flow for 6 years is commonly called an annuity. Assume the cost is paid today and the first $1,400 is received at the end of year 1. What is the NPV, IRR, Payback (in years) and accept/reject decision?
a. $2,400,11%,4.3,Accept
b. $188, 11%, 4.3, Accept
c. $188, 8%,4.3,Reject
d. $2,400, 8%,6,Reject
e. none of the above