(NEED 5&6 PLEASE) You are considering the purchase of a small Youth Hostel in the ski country of Northern Idaho, USA. The initial cost of this purchase is $125,000. The after-tax cash flow from this investment is estimated to be $30,000 per year for the next 5 years. The opportunity cost of capital is 8%. Calculate the following. Initial cost = $125,000 After tax cash flow= $3,000 per years for 5 years Cost of Capital = 8% 1. The Payback Period should you buy the youth hostel if your required payback is less than 4 years? Pay back period = Initial investment/After tax cash flow each year =125,000/3,000 = 4.17 years approx.. If required payback is less than 4 years then this hostel should not be bought. 2. The present value of the benefits (PVB) PVB= Annual cash flow x PVAF (8%,5) =3,000 x PVAF (8%,5) =$11,97.81 .30 3. The present value of the costs (PVC) PV of costs = Initial investment because this is the only one cost which is at year 0, this PV of costs = $125,000 4. The net present value (NPV) should you buy the youth hostel based on NPV rules? NPV=IV of annual cash inflows -Initial Investment =11,971.30 125,000 =-$5218.70 NPV is negative so the hostel should not be bought. 5. Profitability Index (PI) what does the profitability index mean in terms of buying the youth hostel? 6. Internal Rate of Return (IRR) (use interpolation) should you buy the youth hostel based on IRR rules?