Question
Pecan, Inc. is evaluating a project, Project Nut. This project will require an initial investment (i.e., year 0 free cash flow) of $4,000 and provide
Pecan, Inc. is evaluating a project, Project Nut. This project will require an initial investment (i.e., year 0 free cash flow) of $4,000 and provide annual free cash flows of $1,500 for 4 years. The required return, or cost of capital, for a project of this risk is 15% and the firm accepts projects with a payback of 3 years or less. Be sure to clearly label your answers.
Part A: What is Project Nuts internal rate of return (as a percentage out to two decimals = XX.XX%)? Would you accept this project based on the internal rate of return rule?
Part B: What is Project Nuts profitability index (out to at least two decimal places)? Would you accept this project based on the profitability index rule?
Part C: What is Project Nuts payback period (out to at least two decimal places)? Would you accept this project based on the payback period rule?
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