Ring Ring... your good friend, Mo Saleh (MS), is calling you!

MS: Hello friend! I have a strategic project to invest, and I want to know if I should go ahead with it or not.

You: Oh nice. Tell me more about your project.

MS: Operating Cash Flow in Year 1: 130,000, Year 2: 130,000, Year 3: 130,000.

I need to buy a machine in the beginning, and I can sell it for 50,000 at the end of

useful life in year 3.

You: Oh ok! What rate of return are you expecting from this project? MS: It is 11%.

You: What else do you know about this project?

1. If you know the IRR of the project is 10.5%, what would be the initial investment MS would need to make in the beginning?

2. Should MS invest in this project? Why or why not? Please advise MS.

3. MS called you again and said, the project would pay back in less than 3 years, and it is

a good deal to invest. What will you say to MS?