1) You are faced with making a decision on a large capital investment proposal.

Question

1) You are faced with making a decision on a large capital investment proposal. The capital investment amount is $640,000. Estimated annual revenue at the end of each year in the eight year study period is $180,000. The estimated annual year-end expenses are $40,000, starting in year one. Assuming a $20,000 market value at the end of year eight and a MARR 12% per year, answer the following: a) What is the PW of this proposal? b) What is the IRR of this proposal? c) What is the simple payback period for this proposal? d) What is the discounted payback? e) What is your conclusion about the acceptability of this proposal?

Explanation / Answer

Year 0 1 2 3 4 5 6 7 8 Particulars Cash inflow: Revenue    1,80,000.00    1,80,000.00    1,80,000.00 1,80,000.00 1,80,000.00 1,80,000.00 1,80,000.00 1,80,000.00 Less: costs       40,000.00       40,000.00       40,000.00     40,000.00     40,000.00     40,000.00     40,000.00     40,000.00 Net inflow    1,40,000.00    1,40,000.00    1,40,000.00 1,40,000.00 1,40,000.00 1,40,000.00 1,40,000.00 1,40,000.00 Market value     20,000.00 Total cash inflow    1,40,000.00    1,40,000.00    1,40,000.00 1,40,000.00 1,40,000.00 1,40,000.00 1,40,000.00 1,60,000.00 Cash outflow: Capital expenditure -6,40,000.00 Total cash outflow -6,40,000.00 Net inflow -6,40,000.00    1,40,000.00    1,40,000.00    1,40,000.00 1,40,000.00 1,40,000.00 1,40,000.00 1,40,000.00 1,60,000.00 a Present value     56,738.60 b IRR              0.15 c Simple payback Years Flow                                 -   -6,40,000.00                              1.00    1,40,000.00 -5,00,000.00                              2.00    1,40,000.00 -3,60,000.00                              3.00    1,40,000.00 -2,20,000.00                              4.00    1,40,000.00     -80,000.00 About 4 years                              5.00    1,40,000.00       60,000.00                              6.00    1,40,000.00                              7.00    1,40,000.00                              8.00    1,40,000.00 d Year Cash flow PV factor Discounted cash flow Cumulative discounted cash flow                                 -   -6,40,000.00                1.00 -6,40,000.00                              1.00    1,40,000.00                0.89    1,25,000.00 -5,15,000.00                              2.00    1,40,000.00                0.80    1,11,607.14 -4,03,392.86                              3.00    1,40,000.00                0.71       99,649.23 -3,03,743.62                              4.00    1,40,000.00                0.64       88,972.53 -2,14,771.09                              5.00    1,40,000.00                0.57       79,439.76 -1,35,331.33                              6.00    1,40,000.00                0.51       70,928.36     -64,402.97                              7.00    1,40,000.00                0.45       63,328.89       -1,074.08                              8.00    1,40,000.00                0.40       56,543.65       55,469.57 Discounted payback period 7+(1074.08)/56543.65                7.02

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