There are 2 investment funds that you read about in the Wall Street Journal, and
ID: 2762458 • Letter: T
Question
There are 2 investment funds that you read about in the Wall Street Journal, and you would like to evaluate their payback periods. Cloaks requires an initial investment of $1,949, while Daggers requires a $2855 initial investment. The following are the cash flows estimates:
Year
Cloaks
Daggers
1
$200.00
$400.00
2
$400.00
$600.00
3
$600.00
$800.00
4
$800.00
$1,200.00
5
$800.00
$1,400.00
6
$800.00
$1,600.00
7
$800.00
$1,800.00
Assuming an 8% required rate of return, what is the discounted payback on Cloaks
What is the profitability index for Daggers? Assume an 8% required return.
What is the MIRR for each?
Year
Cloaks
Daggers
1
$200.00
$400.00
2
$400.00
$600.00
3
$600.00
$800.00
4
$800.00
$1,200.00
5
$800.00
$1,400.00
6
$800.00
$1,600.00
7
$800.00
$1,800.00
Explanation / Answer
what is the discounted payback on Cloaks?
Answer
Discounted PAyback Period = 4+(-356.56)/544.47 = 3.35 years
What is the profitability index for Daggers?
Profitablity Index = (NPV/Intial Investment)/Initial Investment =( 2558.25+2855)/2,855 = 1.90
What is the MIRR for each?
MIRR = NsQRTsUM OF TERMINAL VALUE/INITIAL INVESTMENT
MIRR = 9.59%
DAGGERS
MIRR = 12.92%
Year Cash flow(CF) Present value Factor(PV =1/(1+i)^n) Discounted CF(CF*PV) Cumulative Discounted CF - (1,949.00) 1.00 (1,949.00) (1,949.00) 1.00 200.00 0.93 185.19 (1,763.81) 2.00 400.00 0.86 342.94 (1,420.88) 3.00 600.00 0.79 476.30 (944.58) 4.00 800.00 0.74 588.02 (356.56) 5.00 800.00 0.68 544.47 187.91 6.00 800.00 0.63 504.14 692.05 7.00 800.00 0.58 466.79 1,158.84Related Questions
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