Blackmores company is evaluating the feasibility of investing $80000 in a projec
ID: 2615171 • Letter: B
Question
Blackmores company is evaluating the feasibility of investing $80000 in a project with a 5 years life. The firm has estimated the cash inflows associated with the proposal as shown in the following table. The firm’s cost of capital is 8%. Company’s policy to recoup investment is four years or less. Average book value is $13550
Require:
a. Calculate the NPV (Net Present Value), Payback Period, profitability Index and AAR ( Average Accounting Return) for the proposed investment
b. Should Blackmores company accept or reject the proposed investment
Year cash inflows Net income 1 $25000 $3000 2 $25000 $2500 3 $25000 $2250 4 $25000 $2600 5 $25000 $3200Explanation / Answer
a) Year Cash inflows PVIFA at 8% PV at 8% 1 25000 0.92593 23148 2 25000 0.85734 21433 3 25000 0.79383 19846 4 25000 0.73503 18376 5 25000 0.68058 17015 99818 NPV = PV of cash inflows-Initial investment = 99818-80000 = $19,818 Profitability index = PV of cash inflows/Initial investment = 99818/80000 = 1.25 Payback period = initital investment]Annual cash inflow = 80000/25000 = 3.2 years Year Net income 1 3000 2 2500 3 2250 4 2600 5 3200 13550 ARR = Average net income/Average investment = (13550/5)/13550 = 20% b) The company should accept the project, because *the NPV is positive, because of which PI is >1. *payback period is less than the maximum 4 years prescribed. *ARR is greater than 8%.
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