(Part 1) Using a 4.4% discount rate, calculate the Net Present Value, Payback, P
ID: 2645179 • Letter: #
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.
Answer
Explanation / Answer
Solution :
Project 1
Initial Invest= $505,000, Cash inflows of $105,000 for years 1-5 and $50,000 for years 6-10
Net present value of cash flows = $ 105,000/(1+0.044)1 + $ 105,000/(1+0.044)2 + $ 105,000/(1+0.044)3 + $ 105,000/(1+0.044)4 + $ 105,000/(1+0.044)5 + $50,000/(1+0.044)6 + $50,000/(1+0.044)7 + $50,000/(1+0.044)8 + $50,000/(1+0.044)9 + $50,000/(1+0.044)10
NPV = - $ 505,000 + $639,711.41
NPV = $ 134711.4148
Payback period
Payback period = payback year + cumulative cash flow of the year / cash flow of the succeding year
Payback period = 4 + 85000/105000
Payback period = 4.80 years .
Profitability Index = Present value of expected future cash flows / Initial outlay
Profitability Index = $639,711.41 / $505,000
Profitability Index = 1.267
To find IRR
$505,000= $ 105,000/(1+r)1 + $ 105,000/(1+r)2 + $ 105,000/(1+r)3 + $ 105,000/(1+r)4 + $ 105,000/(1+r)5 + $50,000/(1+r)6 + $50,000/(1+r)7 + $50,000/(1+r)8 + $50,000/(1+r)9 + $50,000/(1+r)10
Ar r = 10%
The NPV = -$505,000 + $515,721
NPV = $10,721.63
At r = 11%
NPV = -7264.06
IRR = 10% + $10,721.63 / ( 7264.06 + $10,721.63)
IRR = 10.59 %
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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.
NPV = $566,106.13
Payback period = 2 years + 260,000/420,000
Payback period = 2.61 years
profitability Index = $1,666,106.13 / $1,100,000
profitability Index = 1.51
IRR = 17%
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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.
NPV = $545,683.32
payback period = 2 + 240000/300000
payback period = 2 .8 years .
Profitability index = $1,385,683.32 / 840000
PI = 1.65
IRR = 24%
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Assuming a budget of $1,200,000 , the project to be implemented is project 2 because of higher NPV , less payback period , higher PI and higher IRR
Assuming a budget of $2,000,000 , the projects to be implemented is project 2 and 3 again for the above reasons .
year cash flows cumulative cash flow 0 -505000 -505000 1 105000 -400000 2 105000 -295000 3 105000 -190000 4 105000 -85000 5 105000 20000 6 50000 70000 7 50000 120000 8 50000 170000 9 50000 220000 10 50000 270000Related Questions
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