9. Using the following methods which asset would you recommend? Discount Rate 15

Question

9. Using the following methods which asset would you recommend? Discount Rate 15%. a. Net Present Value b. Profitability Index c. Internal Rate of Return. If the company have an IRR Require of 14%, which asset would you recommend? d. Payback Period. If the company requires a Payback Period of FIVE years, which asset would you recommend? e. Discounted Payback Period. If the company requires a Payback Period of FIVE years, which asset would you recommend? f. If the following assets are mutually exclusive, which one do you recommend? Assets #1 ACF ACTORPV of ACF S (3,000,000.00 452.100.0 652,300,0 1.250,000.00 1,240,000.00 1,562,000.00 Assets #2 ACF FACTOR PV of ACF 856,000,0 952,300.00 652.300.0 547.200.0 756,300.0 652,000.0

Explanation / Answer

Answer for question no.1:

NPV= Present value of cash inflows- Present value of cash outflows

Asset 2:

NPV of Asset 2 is more than than of 1.

Answer for question no.b:

Profitability index=Present value of cash inflow/Initial cash outflow

For Asset 1=3193822.325/3000000

=1.06460

For Asset 2

Present value of cash inflows =3321980.011

Initial cash outflow=3,000,000

=3321980.011/3,000,000

=1.1073

Answer for question no.c:

Formula to be used is Excel IRR function ie., IRR( range of values)

For Asset 1=IRR(-3000000,452100,652300,1250000,1240000,1562000)

=17.21%

For Asset 2=IRR(-3000000,956200,856000,952300,652300,547200,756300,652000)

=18.83%

Both the assets are having an IRR greater than 14%, hence both are acceptable.

Answer for question no.d:

Cumulative cash inflows for Asset 1 are as follows:

Cash flows per month in year 4=1240000/12

=103333.33

Cash flows still to be generated=645600/103333.33

=6.2477 months.

i.e., 3 years and 6.2 months.

Pay back period for Asset 2:

The cumulative cash flows have changed to positive in the year 4,

Per month cash flows=652300/12

=54,358.33.

=-235500/54,358.33

=4.33 months

So, the payback period= 3 years and 4.33 months.

Year ACF Factor @15% PV of ACF 0 -3000000 1 -3000000 1 452100 0.869565217 393130.4348 2 652300 0.756143667 493232.5142 3 1250000 0.657516232 821895.2905 4 1240000 0.571753246 708974.0245 5 1562000 0.497176735 776590.0605 Total 193822.3246

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