(Part 1) Using a 4.4% discount rate, calculate the Net Present Value, Payback, P

Question

(Part 1)
Using a 4.4% discount rate, calculate the Net Present Value, Payback, Profitability Index and IRR for each of the investment projects below (note, the inflows are for each year). Based on your calculations rank the projects and support you answer.

Project 1
Initial Invest= $505,000, Cash inflows of $105,000 for years 1-5 and $50,000 for years 6-10

Project 2
Initial Invest= $1,100,000, Cash inflows of $420,000 for years 1-3, $0 for years 4-7 and $250,000 for years 8-10.

Project 3
Initial Invest= $840,000, Cash inflows of $300,000 for years 1-5, $0 for years 6-9 and $100,000 for year 10.

(Part 2)
Assuming a budget of $1,200,000 what are your recommendations for the three projects in the above problem. Explain.

Assuming a budget of $2,000,000 what are your recommendations for the above problem? Explain.

Explanation / Answer

Project 1:

Net Present Value= -505000+420,000/1.044+(420,000/1.044^2)+(420,000/1.044^3)+(105000/1.044^4)+(105000/1.044^5)+(50000/1.044^6)+(50000/1.044^7)+(50000/1.044^8)+(50000/1.044^9)+(50000/1.044^10)= $134711.415

Payback= 4.8095 or 4.81 years

Profitability Index = 639711.415/505000= 1.267

IRR
505000=105000/r+(105000/r^2)+(105000/r^3)+(105000/r^4)+(105000/r^5)+(50000/r^6)+(50000/r^7)+(50000/r^8)+(50000/r^9)+(50000/r^10)= 10.59%

Project 2:

Net Present Value= -1,100,000+420,000 /1.044+(420,000 /1.044^2)+(420,000 /1.044^3)+(250,000/1.044^8)+(250,000/1.044^9)+(250,000/1.044^10)= $566106.125

Payback= 2.62years

Profitability Index = 1666106.125/1,100,000= 1.515

IRR
1,100,000= 420,000 /r+(420,000 /r^2)+(420,000 /r^3)+(250,000/r^8)+(250,000/r^9)+(250,000/r^10)= 17.42%

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