Marietta Company is investigating three different investment opportunities. Info
ID: 2466822 • Letter: M
Question
Marietta Company is investigating three different investment opportunities. Information on the three projects under study is given below: The company uses a discount rate of 5% to assess all potential investment opportunities. Limited funds are available for investment, so the company can only accept one available project. Required: 1. For each project, compute the following: a. Net present value b. Internal rate of return c. Project Profitability d. Payback Period 2. Based on your analysis, which investment opportunity would you recommend to the company? Explain. For any calculations, all work must be shown in order to receive full credit.Explanation / Answer
Marietta Compnay Project Apprisal Project A Project B Project C Year PV Factor @5% Cash Flows PV of Cash Flows Cash Flows PV of Cash Flows Cash Flows PV of Cash Flows Year 0 1.0 (870,000.0) (870,000.0) (850,000.0) (850,000.0) (770,000.0) (770,000.0) Year 1 0.952 188,190.0 179,228.6 136,875.0 130,357.1 237,655.0 226,338.1 Year 2 0.907 188,190.0 170,693.9 136,875.0 124,149.7 237,655.0 215,560.1 Year 3 0.864 188,190.0 162,565.6 136,875.0 118,237.8 237,655.0 205,295.3 Year 4 0.823 188,190.0 154,824.4 136,875.0 112,607.4 237,655.0 195,519.4 Year 5 0.784 188,190.0 147,451.8 136,875.0 107,245.1 Year 6 0.746 188,190.0 140,430.3 136,875.0 102,138.2 Year 7 0.711 136,875.0 97,274.5 Year 8 0.677 136,875.0 92,642.4 Project A Project B Project C Total PV of Cash Inflows 955,194.5 884,652.2 842,712.9 NPV = 85,194.5 34,652.2 72,712.9 Payback Period 4.62 6.21 3.63 Profitability Index= PV of Cash inflows/Investment 1.10 1.04 1.09 IRR 8% 6% 9% Considering Highest NPV and PI and good Patback and IRR , I would suggest Project A which gives highest amount of return to the investment. IRR Calculation IRR -Project A Project A Year PV Factor @8% Cash Flows PV of Cash Flows Year 0 1.0 (870,000.0) (870,000.0) Year 1 0.926 188,190.0 174,250.0 Year 2 0.857 188,190.0 161,342.6 Year 3 0.794 188,190.0 149,391.3 Year 4 0.735 188,190.0 138,325.3 Year 5 0.681 188,190.0 128,079.0 Year 6 0.630 188,190.0 118,591.6 Year 7 0.583 Year 8 0.540 Total (20.3) At required return 8% , The NPV is close to 0. So IRR of the Project is = 8% IRR -Project B Project B Year PV Factor @6% Cash Flows PV of Cash Flows Year 0 1.0 (850,000.0) (850,000.0) Year 1 0.943 136,875.0 129,127.4 Year 2 0.890 136,875.0 121,818.3 Year 3 0.840 136,875.0 114,922.9 Year 4 0.792 136,875.0 108,417.8 Year 5 0.747 136,875.0 102,281.0 Year 6 0.705 136,875.0 96,491.5 Year 7 0.665 136,875.0 91,029.7 Year 8 0.627 136,875.0 85,877.1 Total (34.5) At required return 6 % , The NPV is close to 0. So IRR of the Project is = 6% IRR -Project C Project C Year PV Factor @9% Cash Flows PV of Cash Flows Year 0 1.0 (770,000.0) (770,000.0) Year 1 0.917 237,655.0 218,032.1 Year 2 0.842 237,655.0 200,029.5 Year 3 0.772 237,655.0 183,513.3 Year 4 0.708 237,655.0 168,360.8 Year 5 0.650 Year 6 0.596 Year 7 0.547 Year 8 0.502 Total (64.4) At required return 9% , The NPV is close to 0. So IRR of the Project is = 9%
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