(Part 1) Using a 3.8% discount rate, calculate the Net Present Value, Payback, P

Question

(Part 1)
Using a 3.8% 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= $520,000, Cash inflows of $100,000 for years 1-5 and $50,000 for years 6-10.

Project 2
Initial Invest= $1,050,000, Cash inflows of $400,000 for years 1-3, $0 for years 4-7 and $250,000 for years 8-10.

Project 3
Initial Invest= $820,000, 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 $1,300,000 what are your recommendations for the three projects in the above problem. Explain.

Assuming a budget of $2,100,000 what are your recommendations for the above problem? Explain.

Explanation / Answer

Project 1 Years 0 1 2 3 4 5 6 7 8 9 10 Cash inflows $       100,000.00 $       100,000.00 $              100,000.00 $       100,000.00 $       100,000.00 $         50,000.00 $         50,000.00 $         50,000.00 $         50,000.00 $         50,000.00 Initial investment $               (520,000.00) Net cash flow $               (520,000.00) $       100,000.00 $       100,000.00 $              100,000.00 $       100,000.00 $       100,000.00 $         50,000.00 $         50,000.00 $         50,000.00 $         50,000.00 $         50,000.00 PVAF 1 0.96 0.93 0.89 0.86 0.83 0.80 0.77 0.74 0.71 0.69 Present value of cash flow $               (520,000.00) $         96,339.11 $         92,812.25 $                 89,414.50 $         86,141.13 $         82,987.61 $         39,974.76 $         38,511.33 $         37,101.48 $         35,743.23 $         34,434.71 NPV $                 113,460.11 Accumulated cash flow $               (520,000.00) $     (420,000.00) $     (320,000.00) $            (220,000.00) $     (120,000.00) $       (20,000.00) $         30,000.00 $         80,000.00 $       130,000.00 $       180,000.00 $       230,000.00 payback (in years) 5.40 Profitability index 1.22 IRR 9% Project 2 Years 0 1 2 3 4 5 6 7 8 9 10 Cash inflows $       400,000.00 $       400,000.00 $              400,000.00 $                         -   $                         -   $                         -   $                         -   $       250,000.00 $       250,000.00 $       250,000.00 Initial investment $           (1,050,000.00) Net cash flow $           (1,050,000.00) $       400,000.00 $       400,000.00 $              400,000.00 $                         -   $                         -   $                         -   $                         -   $       250,000.00 $       250,000.00 $       250,000.00 PVF @3.8% 1 0.96 0.93 0.89 0.86 0.83 0.80 0.77 0.74 0.71 0.69 Present value of cash flow $           (1,050,000.00) $       385,356.45 $       371,248.99 $              357,657.99 $                         -   $                         -   $                         -   $                         -   $       185,507.38 $       178,716.16 $       172,173.57 NPV $                 600,660.54 Accumulated cash flow $           (1,050,000.00) $     (650,000.00) $     (250,000.00) $              150,000.00 $       150,000.00 $       150,000.00 $       150,000.00 $       150,000.00 $       400,000.00 $       650,000.00 $       900,000.00 payback (in years) 2.63 Profitability index 1.57 IRR 18% Project 3 Years 0 1 2 3 4 5 6 7 8 9 10 Cash inflows $       300,000.00 $       300,000.00 $              300,000.00 $       300,000.00 $       300,000.00 $                         -   $                         -   $                         -   $                         -   $       100,000.00 Initial investment $               (820,000.00) Net cash flow $               (820,000.00) $       300,000.00 $       300,000.00 $              300,000.00 $       300,000.00 $       300,000.00 $                         -   $                         -   $                         -   $                         -   $       100,000.00 PVAF 1 0.96 0.93 0.89 0.86 0.83 0.80 0.77 0.74 0.71 0.69 Present value of cash flow $               (820,000.00) $       289,017.34 $       278,436.74 $              268,243.49 $       258,423.40 $       248,962.82 $                         -   $                         -   $                         -   $                         -   $         68,869.43 NPV $                 591,953.22 Accumulated cash flow $               (820,000.00) $     (520,000.00) $     (220,000.00) $                 80,000.00 $       380,000.00 $       680,000.00 $       680,000.00 $       680,000.00 $       680,000.00 $       680,000.00 $       780,000.00 payback (in years) 2.73 Profitability index 1.72 IRR 25% RANKING OF PROJECTS ON THE BASIS OF:- NPV IRR Payback Profitability Index Project 1 III III III III Project 2 I II I II Project 3 II I II I Initial investment Project 1 $                 520,000.00 Project 2 $              1,050,000.00 Project 3 $                 820,000.00 Assuming budget of $1,300,000 we would recommend to choose project 2, reason being this project has got highest NPV as compared to other projects and the projects with higher NPV are alway given preference in case there is clash between the decision based on NPV and IRR. Assuming budget of $2,100,000 we would recommend to choose project 2 and 3, reason being they both are the better than project 1 in all ways and combined investment in both these projects is less than $2,100,000

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