NPV; PI; payback; IRR Pete’s Paving provides custom paving of sidewalks and driv
ID: 2456123 • Letter: N
Question
NPV; PI; payback; IRR
Pete’s Paving provides custom paving of sidewalks and driveways. One of the most labor-intensive aspects of the paving operation is preparing and mixing materials. Sharon Guillon, corporate engineer, has found new computerized equipment to mix (and monitor the mixing of) materials. According to information received by Guillon, the equipment’s cost is $580,000 and has an expected life of eight years. If purchased, the new equipment would replace manually operated equipment. Data relating to the existing and replacement mixing equipment follow.
a. Assume that the company’s cost of capital is 10 percent, which is to be used in discounted cash flow analysis. Compute the net present value and profitability index of investing in the new equipment. Round the profitability index to one decimal place.
b. Compute the payback period for the investment in the new equipment. (Ignore taxes.) Round your answer to one decimal place.
? years
c. Compute the IRR for the equipment investment. Round your answer to the nearest whole percent.
Net present value $ Profitability indexExplanation / Answer
Solution:
(A). Caluculation of Net Present Value:
Net Present Value = 10% * 1 - ( 1 + 0.10)8 - 5,80,000
Net Present Value = 4,19,952.21
Present Value of Expected Cash Flow = $ 1,60,047.79
(B). Caluculation of Profitability Index:
Profitability Index = 1 + 4,19,952.21 / 5,80,000
= 1 + 0.724
= 1.724
(C). Caluculation of Payback Period:
Paybak Period = 5,80,000 / 1,50,000
= 3.86 Years
Net Present Value = R * 1 - ( 1 + i)n - Inintial InvestmentRelated Questions
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