EXCEL WORKSHEET. You are offered an asset that costs $14,000 and has cash flows

Question

EXCEL WORKSHEET. You are offered an asset that costs $14,000 and has cash flows as follows below at the end of each quarter for the next 8 years. Then it will be sold for $2,500. Your cost of capital is 6.5 percent. An alternative (mutually exclusive) project is available which offers an accounting rate of return of 8%, a classical payback period of 5 years and a discounted payback period of 5 years. Year 1: $800 each quarter Year 2: $850 each quarter Year 3: $850 each quarter Year 4: $950 each quarter Year 5: $800 each quarter Year 6: $600 each quarter Year 7: $500 each quarter Year 8: $400 each quarter a) What is the IRR of the asset? (2 points) b) What is the NPV of the asset? (1 point 2 points) c) What are the PI and NPI of the asset? (BONUS QUESTION: 1 point) d) What are the classical and discounted payback periods? (BONUS QUESTION: 1 point) e) What are the four accounting rate of returns (utilizing cash flows)? (BONUS QUESTION: 1 point) f) Should you purchase it? Base your answer on your solutions to parts a through e a and b (IRR and NPV) and explain why.

Explanation / Answer

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Quarter Inflow =1/(1+.08/4)^n PV Cummulative Disc Cummu 0 -14000 1 -14,000.00 -14000 -14000 1 800 0.980392157          784.31 -13,200.00 -13,215.69 2 800 0.961168781          768.94 -12,400.00 -12,446.75 3 800 0.942322335          753.86 -11,600.00 -11,692.89 4 800 0.923845426          739.08 -10,800.00 -10,953.82 5 850 0.90573081          769.87     -9,950.00 -10,183.95 6 850 0.887971382          754.78     -9,100.00     -9,429.17 7 850 0.870560179          739.98     -8,250.00     -8,689.19 8 850 0.853490371          725.47     -7,400.00     -7,963.73 9 850 0.836755266          711.24     -6,550.00     -7,252.49 10 850 0.8203483          697.30     -5,700.00     -6,555.19 11 850 0.804263039          683.62     -4,850.00     -5,871.57 12 850 0.788493176          670.22     -4,000.00     -5,201.35 13 950 0.773032525          734.38     -3,050.00     -4,466.97 14 950 0.757875025          719.98     -2,100.00     -3,746.98 15 950 0.74301473          705.86     -1,150.00     -3,041.12 16 950 0.728445814          692.02        -200.00     -2,349.10 17 800 0.714162562          571.33          600.00     -1,777.77 18 800 0.700159375          560.13      1,400.00     -1,217.64 19 800 0.68643076          549.14      2,200.00        -668.49 20 800 0.672971333          538.38      3,000.00        -130.12 21 600 0.659775817          395.87      3,600.00          265.75 22 600 0.646839036          388.10      4,200.00          653.85 23 600 0.634155918          380.49      4,800.00      1,034.34 24 600 0.621721488          373.03      5,400.00      1,407.38 25 500 0.609530871          304.77      5,900.00      1,712.14 26 500 0.597579285          298.79      6,400.00      2,010.93 27 500 0.585862044          292.93      6,900.00      2,303.86 28 500 0.574374553          287.19      7,400.00      2,591.05 29 400 0.563112307          225.24      7,800.00      2,816.30 30 400 0.552070889          220.83      8,200.00      3,037.12 31 400 0.54124597          216.50      8,600.00      3,253.62 32 400 0.530633304          212.25      9,000.00      3,465.88 NPV      3,465.88 Pay period years (16+200/600)/4               4.08 Years Discounted Payback (20+130/265.75)/4               5.12 Years IRR (annual) 3.80% 15.21% Annual PI =(3465.88+14000)/14000               1.25 Times

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