Suppose Palmer Properties is considering investing $2.6 million today (i.e., C0 =-2,600,000) on a new project that is expected to last for 7 years.
The project is expected to generate annual cash flows of
C1 = -250,000;
C2 = 300,000,
C3 = 500,000
and then $800,000 for period C4 through C7.
If the discount rate is 8% and management’s payback period cutoff is 5 years:
(a) What is the payback period for the project? Show your work
(b) What is the net present value of the project? Show your work
(c) What is the internal rate of return on the project? Show your work
(d) Under which method(s) above should the company accept the project (applying the acceptance rules)? Explain