Naomi has always wanted to open a cyber coffee shop and has made her cash flow projections. She estimates that it will cost her $225,000 to develop the project, and the cash flows for the next six years will be $45,000, $69,000 , $125,000, $185,000, $189,000 and $200,000 respectively.

1. If her cost of capital is 9.5%, what is the net present value and internal rate of return of her project ?

2. Should she accept or reject this investment ?

3. What would be the payback period for Naomi's proposal in the preceding question ?

4. If the maximum allowable time is 2.5 years, should Naomi accept this project ?

Bernard has been approached about a hotel investment proposal by a young entrepreneur named Winston. The young man seems to have done his homework and presents Bernard with a five-year pro forma showing cash flows of $128,000, $138,900, $141,250, $142,870 and $146,780 respectively. Bernard knows he can earn an 8% return if he puts his money in a mutual fund. Winston is asking for $500,000.

1. What is the internal rater of return of this project ?

2. Should Bernard invest in this project ?

3. If you assume 8% as the cost of capital, compute net present value.