The Great Eastern Toys Company is evaluating a new product. The cash flows that are expected from

Question:

The Great Eastern Toys Company is evaluating a new product. The cash flows that are expected from this product over its five years’ expected life are shown be- low. Note that the final year’s cash flow includes $2,000 of working capital to be recovered at the end of the project.

Cash Flow

Now…………………………………… −$18,000

End-of-Year 1 to 4……………………… 5,200

End-of-Year 5 ……………………………… 7,200

a. Compute the following measures:

1. Payback period

2. Discounted payback period at a 10 percent discount rate

3. Net present value at a 10 percent discount rate

4. Internal rate of return

5. Profitability index

b. Should the project be undertaken?

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