Using a 5% discount rate, calculate the Net Present Value, Payback, Profitabilit
ID: 2716578 • Letter: U
Question
Using a 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= $500,000, Cash inflows of $100,000 for years 1-5 and $50,000 for years 6-10. Project 2 Initial Invest= $1,000,000, 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= $800,000, 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 Initial Invest= $500,000, Cash inflows of $100,000 for years 1-5 and $50,000 for years 6-10.
NPV of Project 1 = -500000 + 100,000*(1-1/1.05^5)/5% + 50000/1.05^6 + 50000/1.05^7 + 50000/1.05^8 + 50000/1.05^9 + 50000/1.05^10=$102560.58
Profitability Index = (100,000*(1-1/1.05^5)/5% + 50000/1.05^6 + 50000/1.05^7 + 50000/1.05^8 + 50000/1.05^9 + 50000/1.05^10)/500000= 1.21
Payback = 5 years
IRR
-500000 + 100,000*(1-1/(1+IRR)^5)/5% + 50000/(1+IRR)^6 + 50000/(1+IRR)^7 + 50000/(1+IRR)^8 + 50000/(1+IRR)^9 + 50000/(1+IRR)^10=0
IRR = 9.82%
Project 2 Initial Invest= $1,000,000, Cash inflows of $400,000 for years 1-3, $0 for years 4-7 and $250,000 for years 8-10.
NPV = -1000000 + 400000*(1-1/1.05^3)/5% + 250000/1.05^8 + 250000/1.05^9 + 250000/1.05^10=$573,139.59
PI= (400000*(1-1/1.05^3)/5% + 250000/1.05^8 + 250000/1.05^9 + 250000/1.05^10)/1000000= 1.57
Payback = 2 + (1000000-2*400000)/4000000= 2.05 years
IRR
-1000000 + 400000*(1-1/(1+IRR)^3)/5% + 250000/(1+IRR)^8 + 250000/(1+IRR)^9 + 250000/(1+IRR)^10= 0
IRR = 26.48%
Project 3 Initial Invest= $800,000, Cash inflows of $300,000 for years 1-5, $0 for years 6-9 and $100,000 for year 10.
NPV = -800000 + 300000*(1-1/1.05^5)/5% + 100,000/1.05^10=$560,234.33
PI= (300000*(1-1/1.05^5)/5% + 100,000/1.05^10)/800000= 1.70
Payback = 2+ (800000-2*300000)/300000= 2.67 years
IRR
= -800000 + 300000*(1-1/(1+IRR)^5)/IRR + 100,000/(1+IRR)^10=0
IRR = 26.92%
Assuming a budget of $1,200,000 what are your recommendations for the three projects in the above problem.
Invest in Project 2 which has the maximum NPV
Assuming a budget of $2,000,000 what are your recommendations for the above problem? Explain.
Invest in Project 2 and B because it will maximize the NPV
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