Stanley International Limited ( SIL) is evaluating the feasibility of investing $100,000 in a piece of equipment that has a 4-year life. The financial manager for SIL has the following information for you to analyze:

Year Cash Inflows (Benefits)

1 $ 40,000

2 50,000

3 50,000

4 40,000

The capital structure for SIL consists of 50% long-term debt at a cost of 8% and 50% equity at an expected return of 12%. The tax rate for SIL is 25%.

SIL accepts projects, as part of corporate policy, if projects meet the following criteria:

• Modified Payback should be 3 years or less
• The IRR should be at least 1.50 times the cost of capital
• NPV should be positive.
• Profitability index is at least 1.25

Required:

1. Determine your cost of capital for evaluating this proposal (2 marks)
2. What is the Modified Payback period for this proposal? (2 Marks)
3. What is the Net Present Value (NPV) for the investment? (5 Marks)
4. What is the Internal Rate of Return (IRR) for this investment (3 Marks)?
5. Evaluate acceptability of the investment using Payback, NPV and IRR.

What would be your recommendation? Why? (2 Marks)