(Part 1) Using a 4.5% discount rate, calculate the Net Present Value, Payback, P
ID: 2631252 • Letter: #
Question
(Part 1) Using a 4.5% 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= $490,000, Cash inflows of $100,000 for years 1-5 and $50,000 for years 6-10. Project 2 Initial Invest= $970,000, 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 $1,100,000 what are your recommendations for the three projects in the above problem. Explain. Assuming a budget of $2,200,000 what are your recommendations for the above problem? Explain.
Explanation / Answer
Solution.
1. Net Present Value
2. Payback
Project A = 4 year + 90,000 / 100,000
= 4.9 year
Project B = 2 year + 170,000 / 400,000
= 2.42 year
Project C = 2 year + 220,000 / 300,000
= 2.73 year
3. Profitability Index
Project A = 124,650 / 490,000
= 0.25
Project B = 633,300 / 970,000
= 0.65
Project C = 560,400 / 820,000
= 0.68
4. IRR
Project A = 10.38%
Project B = 20.83%
Project C = 24.86%
Used Excel Formula (=IRR(cell range) press enter
5. project recomandations.
Ranking of project according to Method
I am takeing base of decision is IRR method.
According to this method
If budget is $1,100,000 than we should be invest in Project C.
If budget is $2,200,000 than also we should be invest in Project C.
Project A B C P.V Factor 4.5% P.V ofA P.V of B P.V of C Year 0 (490,000) (970,000) (820,000) 1 (490,000) (970,000) (820,000) 1 100,000 400,000 300,000 0.956 95,600 382,400 286,800 2 100,000 400,000 300,000 0.915 91,500 366,000 274,500 3 100,000 400,000 300,000 0.876 87,600 350,400 262,800 4 100,000 - 300,000 0.838 83,800 - 251,400 5 100,000 - 300,000 0.802 80,200 - 240,600 6 50,000 - - 0.767 38,350 - - 7 50,000 - - 0.734 36,700 - - 8 50,000 250,000 - 0.703 35,150 175,750 - 9 50,000 250,000 - 0.672 33,600 168,000 - 10 50,000 250,000 100,000 0.643 32,150 160,750 64,300 Total 750,000 1,950,000 1,600,000 614,650 1,603,300 1,380,400Related Questions
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