2. (3pts) XYZ Corporation is considering investing in a new machinery that cost

Question

2. (3pts) XYZ Corporation is considering investing in a new machinery that cost $650,000. The cost of capital or required rate of return is 9.5%. The project has the following cash flows per year (see below). Calculate the NPV and the IRR of the project.

Year

Cash Flow

0

$     (650,000)

1

120000

2

150000

3

200000

4

200000

5

200000

6

200000

NPV=

IRR=

Should the project be accepted? _________Yes              __________No

b. What is the profitability index of the project? (1.18)

Year

Cash Flow

0

$     (650,000)

1

120000

2

150000

3

200000

4

200000

5

200000

6

200000

NPV=

IRR=

Explanation / Answer

NPV of the project = 119260

IRR = 9.5% + 6.67% i.e 16.17 %

Project shold be accepted as the NPV is positive

PI = 769260/650000 i.e 1.183

Particulars Year Cash flow PVF @ 9.5% PV @ 9.5% PVF @ 20% PV @ 20% Cash outflow 0 650000 1 650000 1 650000 Present value of cash outflow 650000 650000 Cash inflow 1 120000 0.913 109560 0.833 99960 Cash inflow 2 150000 0.834 125100 0.694 104100 Cash inflow 3 200000 0.762 152400 0.579 115800 Cash inflow 4 200000 0.696 139200 0.482 96400 Cash inflow 5 200000 0.635 127000 0.402 80400 Cash inflow 6 200000 0.58 116000 0.335 67000 Present value of cash inflows 769260 563660 Net Present value 119260 -86340

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