Froogle enterprises is evaluating an unusual investment project. What makes the
ID: 2762717 • Letter: F
Question
Froogle enterprises is evaluating an unusual investment project. What makes the project unusual is the stream of cash inflows and outflows shown in the following table: Why is it difficult to calculate the payback period for this project Calculate the investment's net present value at each of the following discount rates: 0%. 5%. 10%, 15%, 20%, 25%. 30%. 35%. What docs your answer to part b tell you about this project's IRR Should Froogle invest in this project if its cost of capital is 5% What if the cost of capital is 15% In general when faced with a project like this, how should a firm decide whether to invest m the project or reject itExplanation / Answer
a.
For the given cash flows it is difficult to calculate the payback period because the project has negative cash flows in the middle of the project.
b.
Calculation of Net present value of the investment using different discount rates:
1
At Discount Rate
0%
Year
Cash Flow (CF)
PVF
PV = CF*PVF
0
$ 220,000
1.00000
$ 220,000.00
1
$ (1,012,000)
1.00000
$ (1,012,000.00)
2
$ 1,740,200
1.00000
$ 1,740,200.00
3
$ (1,325,720)
1.00000
$ (1,325,720.00)
4
$ 377,520
1.00000
$ 377,520.00
Net Present Value
$ -
2
At Discount Rate
5%
Year
Cash Flow (CF)
PVF
PV = CF*PVF
0
$ 220,000
1.00000
$ 220,000.00
1
$ (1,012,000)
0.95238
$ (963,809.52)
2
$ 1,740,200
0.90703
$ 1,578,412.70
3
$ (1,325,720)
0.86384
$ (1,145,206.78)
4
$ 377,520
0.82270
$ 310,586.64
Net Present Value
$ (16.97)
3
At Discount Rate
10%
Year
Cash Flow (CF)
PVF
PV = CF*PVF
0
$ 220,000
1.00000
$ 220,000.00
1
$ (1,012,000)
0.90909
$ (920,000.00)
2
$ 1,740,200
0.82645
$ 1,438,181.82
3
$ (1,325,720)
0.75131
$ (996,033.06)
4
$ 377,520
0.68301
$ 257,851.24
Net Present Value
$ -
4
At Discount Rate
15%
Year
Cash Flow (CF)
PVF
PV = CF*PVF
0
$ 220,000
1.00000
$ 220,000.00
1
$ (1,012,000)
0.86957
$ (880,000.00)
2
$ 1,740,200
0.75614
$ 1,315,841.21
3
$ (1,325,720)
0.65752
$ (871,682.42)
4
$ 377,520
0.57175
$ 215,848.29
Net Present Value
$ 7.08
a.
For the given cash flows it is difficult to calculate the payback period because the project has negative cash flows in the middle of the project.
b.
Calculation of Net present value of the investment using different discount rates:
1
At Discount Rate
0%
Year
Cash Flow (CF)
PVF
PV = CF*PVF
0
$ 220,000
1.00000
$ 220,000.00
1
$ (1,012,000)
1.00000
$ (1,012,000.00)
2
$ 1,740,200
1.00000
$ 1,740,200.00
3
$ (1,325,720)
1.00000
$ (1,325,720.00)
4
$ 377,520
1.00000
$ 377,520.00
Net Present Value
$ -
2
At Discount Rate
5%
Year
Cash Flow (CF)
PVF
PV = CF*PVF
0
$ 220,000
1.00000
$ 220,000.00
1
$ (1,012,000)
0.95238
$ (963,809.52)
2
$ 1,740,200
0.90703
$ 1,578,412.70
3
$ (1,325,720)
0.86384
$ (1,145,206.78)
4
$ 377,520
0.82270
$ 310,586.64
Net Present Value
$ (16.97)
3
At Discount Rate
10%
Year
Cash Flow (CF)
PVF
PV = CF*PVF
0
$ 220,000
1.00000
$ 220,000.00
1
$ (1,012,000)
0.90909
$ (920,000.00)
2
$ 1,740,200
0.82645
$ 1,438,181.82
3
$ (1,325,720)
0.75131
$ (996,033.06)
4
$ 377,520
0.68301
$ 257,851.24
Net Present Value
$ -
4
At Discount Rate
15%
Year
Cash Flow (CF)
PVF
PV = CF*PVF
0
$ 220,000
1.00000
$ 220,000.00
1
$ (1,012,000)
0.86957
$ (880,000.00)
2
$ 1,740,200
0.75614
$ 1,315,841.21
3
$ (1,325,720)
0.65752
$ (871,682.42)
4
$ 377,520
0.57175
$ 215,848.29
Net Present Value
$ 7.08
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