3. (20 points) The Bolster Company is considering project A. It cost SMioving 5
ID: 2805251 • Letter: 3
Question
3. (20 points) The Bolster Company is considering project A. It cost SMioving 5 years ane beginning. The initial cash in the table. The cost of capital on this project is 12 percent. outlay and the free cash flows for the ,000 at the ng 5 years are shown Year Project A 0 $100,000 10,000 230,000 20,000 40,000 5 50,000 4 a. What is the project's payback period? b. What is the project's discounted payback period? c. What is the project's net present value? d. What is the project's internal rate of return? e. Should the company accept the project and why?Explanation / Answer
Payback Year FCF Cummulative 0 -1,00,000 -1,00,000 1 10,000 -90,000 2 30,000 -60,000 3 20,000 -40,000 4 40,000 - 5 50,000 50,000 Payback period is 4 years Discounted payback Year FCF Dis fact Dis FCF Cummulative Dis FCF 0 -1,00,000 1 -1,00,000 -1,00,000 1 10,000 0.892857143 8,929 -91,071 2 30,000 0.797193878 23,916 -67,156 3 20,000 0.711780248 14,236 -52,920 4 40,000 0.635518078 25,421 -27,499 5 50,000 0.567426856 28,371 872 Discounted payback=4+27499/(27499+872) 4.97 Discounted Payback period 4.97 years NPV of the project Year FCF Dis fact Dis FCF 0 -1,00,000 1 -1,00,000 1 10,000 0.892857143 8,929 2 30,000 0.797193878 23,916 3 20,000 0.711780248 14,236 4 40,000 0.635518078 25,421 5 50,000 0.567426856 28,371 NPV 872 IRR of the project Lets discount it to another 13% rate Year FCF Dis fact Dis FCF 0 -1,00,000 1 -1,00,000 1 10,000 0.884955752 8,850 2 30,000 0.783146683 23,494 3 20,000 0.693050162 13,861 4 40,000 0.613318728 24,533 5 50,000 0.542759936 27,138 NPV -2,124 IRR=12+872/(872+2124)*(13-12) 12.29% Yes project should be accepted as NPV>0 & IRR>12% & payback period is 4 yearsi.e.before the end of the project
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