# solution

A project has the following cash flows

Period Cash Flow
0 (100,000)
1 25,000
2 45,000
3 35,000
4 35,000
5 25,000

a) Calculate the payback period for the project. (4 Marks)
b) If the company requires a payback period of 3.5 years, should the project be accepted or rejected? (2 Marks)
c) Calculate the NPV of the project if the discount rate is 6%. (6 Marks)
d) What can you say about the IRR of the project? No calculations required. (2 Marks)
e) Sketch the NPV profile. (2 Marks)

9) Sarah is considering adding toys to her general store. She hired a MSVU student, Jason, to do an analysis of the project and paid him \$500 last month. Jason estimated that the initial investment (cost) for this new toy line will be \$85,000. Toy sales are expected to produce after tax cash flows of \$15,000 per year over the next ten years. Sarah has determined her cost of capital is 7%.
a) Based on the payback method, should Sarah add toys to her store if she requires a three-year payback period for all projects? Why or why not? Show your work. (5 Marks)
b) Based on NPV analysis, should Sarah add toys to her general store? Show your work. (7 Marks)
c) Shelf space in the general store is quite limited and Sarah is considering adding a line of pet supplies instead of toys. She has asked Jason to make a recommendation on which product line she should choose. Jason remembers from his Finance class that the goal is to maximize the value of the company. Jason has determined the following: IRR of the toy product line: 11.93% NPV of the pet supply product line: \$10,000 IRR of the pet supply product line: 12.5% Which product line should Jason recommend? Explain.

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